Hello everyone,
I am trying to simulate a small open economy DSGE model which includes a government and incomplete asset markets.
Incomplete asset markets are modelled as a debt-sensitive premium on the foreign interest rate, as described in Schmitt-Grohé and Uribe 2003. The government has a balanced budget in every period, while the rest of the model is standard from Gali and Monacelli 2005.
When i am trying to simulate the linearized version consiting of 14 equations, Dynare keeps telling me that the system is not stable (Blanchard-Kahn conditions are not satisfied). Although there is very little new about this model, i think i might have forgotten some necessary parts of it.
Since i badly need the impulse responses for my master thesis, i would greatly appreciate any help! All the equations are well commented in the file i attached, so if somebody notices that there is something missing or wrong, even a small hint will be a big help.
Many many thanks,
Simon
SOE.mod (2.71 KB)