Hi All! When I run the attached model, the BK condition is not satisfied. And I run the model_diagnostics(M_,options_,oo_) commend, it says there is a colinear relationship between Equation 3 and 37. However, equation 3 is the Euler equation and 37 stands for the exogenous interest rate. If following the suggestion of Dynare, I do not know which equation I need to delete and which equation I lost. Please help! Thanks!

V1.mod (4.97 KB)

You have a unit root in your model. In that case, there will always be collinearity. Check whether the unit root is intended. If not, there is already the source of your problem.

Thanks Jpfeifer! Is the unit root caused by the values of the parameters?

I don’t know. Often it is, but it could also be that you implicitly set an unspecified parameter like

Here the AR1-process has a coefficient of one, but is not parameterized.

In short: it could be a parameter, as mistake in an equation or a feature of your model.

Thank you so much, Johannes! I found two equations with unit roots which are

`B_s*B(-1)+r_s*B_s*(r(-1)+B(-1))+Y_s*P_s*(Y+P)+W_s*W=G_s*P_s*(G+P)+B_s*B`

and

`P_s*C_s*(P+C)+B_s*B=(1+tauw)*W_s*L_s*(W+L)+B_s*(1+r_s)*B(-1)+r_s*B_s*r(-1)`

.

Because I set the steady state value of interest rate r_s equals to 1/beta-1, the unit root occurs. Would you please tell me in this case, what should I do? Recode B(-1) to B and B to B(+1)?

I don’t know, because it is your model. It might be the problem discussed in ideas.repec.org/a/eee/inecon/v61y2003i1p163-185.html