Dear all,

my co-authors and I are working on a closed economy DSGE model including households, entrepreneurs, capital producers, retailers, a central bank and a fiscal sector and a banking sector. The banking sector is modelled according to Gerali et al. (2010). It includes a wholesale branch which underlies a leverage constraint and a retail branch that gives credit to entrepreneurs (under a borrowing constraint) and to the government. The fiscal sector is modelled including the government budget constraint, a fiscal spending rule and a fiscal tax rule.

We calculated the steady state by fixing K/Y, G/Y and T/Y shares. Dynare finds the steady state and is able to calculate moments and impulse responses. However, we get the following error message:

model_diagnostic: the Jacobian of the static model is singular, there is 1 colinear relationships between the variables and the equations

Colinear variables:

c_p

d_p

lam_p

l_p

c_e

k_e

b_ee

lam_e

s_e

l_pd

y_e

r_k

mc_E

J_R

x

I

C

Y

w_p

B

D

K

J_B

K_b

lev

rr

G

T

b_g

pi

r_ib

R_b

r_be

r_bg

spread_e

spread_g

Colinear equations

17

The collinear equation is the fiscal spending rule and collinearity affects almost all variables of the model (36 out of 42).

We tried leaving out the government budget constraint because in steady state it cannot be distinguished from the fiscal tax rule and instead included the retail profit function. This does not help and neither do specifications with taxes only paid by households or different specifications of the world resource constraint. We suspect that the model does not know how to allocate credit to entrepreneurs and the government, although they pay different interest rates.

We’re obviously missing something and would be very grateful for any ideas. I attach our mod-file.

Many thanks in advance!

CBB_Gov_closed_econ_20171110.mod (11.0 KB)