Regional DSGE Model

Hi Everyone!

My regional DSGE model is not working in Dynare, and I believe it has something to do with the model.

The error is: “There are 6 eigenvalue(s) larger than 1 in modulus for 9 forward-looking variable(s); The rank condition isn’t verified.”

I have reviewed the model and checked similar topics but couldn’t solve the problem. I know the problem has to do with the regional equations, but I don’t know what I should change to make it work.

Could anyone please take a look at the mod file and provide some insights?

Thanks in advance.


REG_MODEL_v2.mod (14.4 KB)

The eigenvalues show that your model features two unit roots. Is this an intended part of the model? Otherwise it would mean that there are redundant equations while non-redundant equations are missing.
This is impossible to tell from the outside. If you built your model based on some working code, I would go back and start adding features one-by-one to see what causes the issues.

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The unit roots come from the consideration of price levels instead of just inflation rates. That is kind of expected with definitions like

[name='National Gross Inflation Rate']
% equation 24 %
pit = Pt - Pt(-1);

But it’s not clear to me whether these levels are uniquely determined. It seems you set up your model in nominal terms, but in most of these models, only relative prices and changes are uniquely determined. That may explain the indeterminacy.

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Prof. Girstmair, Prof. Pfeifer,

Thank you so much for the considerations.

I am reviewing the model.