I have a fairly standard SOE model a la Monacelli augmented with habit formation and price indexation. The model works fine when the interest rate is set by the domestic central bank via a Taylor Rule but the following error appears when I set e=0 (for a fixed exchange rate regime)
There are 7 eigenvalue(s) larger than 1 in modulus
for 6 forward-looking variable(s)
The rank conditions ISN’T verified!
??? Error using ==> print_info
Blanchard Kahn conditions are not satisfied: no stable equilibrium
Error in ==> stoch_simul at 44
print_info(info, options_.noprint);
Error in ==> SOE at 222
info = stoch_simul(var_list_);
Error in ==> dynare at 125
evalin(‘base’,fname) ;
Setting e=0 worked for Monacelli’s model but not for me. Could anyone please help me out? But more importantly, is this the best way to model a fixed exchange rate regime?
I am attaching the model
SOE.mod (4.63 KB)