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.
You have no forward-looking variables in your model. Re-write the Euler and NKPC equations to incorporate forward-looking variables and your model will work.
Regards
I saw your mod file for the small open economy and I liked it because i believe it can help achieve the research I am conducting. I intend to add wage bargaining to it among other things for my analysis. I tried to fix it as advised by jdacuddy but it did not work. Do you mind sharing the working mod file and perhaps the written paper so that I can study it in detail and examine if it can meet my research demands?
The other reason I am asking for your paper is that, in my project, I used the marginal cost from your mod file but I struggled to figure out how you solved it from Gali and Monacelli (2005) paper because it is different. I believe I can figure it out if I read it from your paper.