RANK isn't verified in a two country NK

Stochastic simulations
1

Hi,

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.

2

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

3

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?

4

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.

5

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