I’m developing a toy model with two types of consumption goods, to later add more features and answer interesting questions. For now, it is just a standard NK model, but with two consumption goods instead of one. I define the model in terms of the relative price of good 1 and 2. When I run the model, I get reasonable results, but looking into the “Policy and transition functions”, I’m pretty sure there is a mistake. The relative price of good 1 and 2 shows up as a state variable and there are policy functions. In the standard NK model (Gali, ch.3), the price of the good does not show up in that table.
I think the problem is that I am defining the relative price and linking the inflation terms of good 1 and 2 with it (equation 2 in the .mod file). Instead of this equation, is there an equation I am missing?
two_good_nk_simple.mod (7.9 KB)