RANK isn't verified in a two country NK


I am trying to run a two country NK model without open macro elements and a common monetary authority. I am running into indeterminacy issues: There are 3 eigenvalue(s) larger than 1 in modulus
for 4 forward-looking variable(s). The rank condition ISN’T verified!

Timing seems not to be a problem since.

nk_model.mod (3.9 KB)

Thanks in advance for your help.

You need to check whether your monetary policy rule provides a sufficient inflation feedback given the composites of the model.

Thank you for your quick response. I have tried different coefficients in the Taylor rule and that does not solve the problem. Is there potentially a problem with finding a unique equilibrium for two economies who do not trade with a single monetary instrument?

No, multiple local equilibria would give you an error message. However, there may be multiple steady states. If you pick the wrong one, it may explain differing results.

Hi. First, you might be running into a problem where the two countries might be sharing an insurance scheme which implies that their consumption is equalised. Second, why is inflation rate different across the two countries? Take a look at Ferrero 2005 for a very good reference model. https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp502.pdf