Redundant Equations

Hi! I’m pretty new at the DSGE modelling and Dynare. I’m trying ro replicate “The new financial regulation in Basel III and monetary policy:A macroprudential approach”, which is a mix of Iacoviello 2005 and 2015. After many unsuccessful attempts, I have finally run the model. I’ve just replaced some equations.But, I didn’t understand the reasoning behind it. I have a general question; for example if we have 22 variables,I know, we need to have 22 equations, but which equations should be included. Should we take all the first order conditions along with budget constraints?

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You need all first order conditions, including the budget constraints (which are first order conditions as well). On top of that, you need equations defining any new variable that you introduce.

Thank you for the reply Professor.

Sorry professor, I’m facing with a new problem now. The model has a capital requirement ratio that keeps bank’s asset-liability balance above a certain ratio, determined by Basel Standards. The model runs when that ratio is 0.08 in line with Basel I,II, however it doesn’t meet Blanchard-Kahn conditions when that ratio increases to 0.105 as per Basel III. According to the paper, it should be running given monetary policy. Could you also recommend decent sources to learn DSGE methods, I am trying to learn without any guidance. Thank you in advance. @jpfeifer

CBB1.mod (2.3 KB)

That is strange. Given that your model already runs, one would usually exclude a timing error that often causes this. Have you asked the original authors for their codes?

Thank you for the reply Professor, I haven’t asked it yet.