Hi everyone. I found a replicating code for Gertler and Karadi 2013. I augmented it with a shock to sovereign bond returns and everything went smoothly.
Then I extended it to include a shock on the fraction of capital that can be diverted defined as theta in the paper and lambda in the code. More specifically, the lambda is now extended as lambda*(1+exp(ksimbda_ss)) where all the values associated with ksimbda are related to the new shock.
I can’t understand why I get this error “Blanchard & Kahn conditions are not satisfied: indeterminacy due to rank failure.” It could be related to the size of lambda after the shock but I’m not sure.
Can anybody help me?
theta_shock.mod (34.3 KB)
Are you sure (1+exp(ksimbda_ss)) is correct? With ksimbda_ss=0 the steady state of that expression will be 1+e\approx3.7
Thank you Professor. I changed it to lambda*exp(ksimbda_ss) but I get the same issue.
Is this the correct way to shock a parameter?
No, in that case the steady state would be about 2.7. You should have
lambda*ksimbda_ss
with ksimbda_ss=0