Hi guys,
I’ve attached a working version of the Gali Monacelli model. It reproduces the impulse responses in Figure 1 of the NBER Working Paper.
Not sure why Dynare has trouble with the UIP condition. I have a hunch: from equation (18) and Appendix 1 of the paper, we know that the exchange rate is pinned down uniquely; but Dynare can’t read Appendix 1. So when you tell it “e(+1) - e = r - r_star”, it thinks that “e” isn’t determined. (But then why would Monacelli’s AIM be able to solve it? — and given that, why would Dynare’s AIM fail…?)
In any case, as the authors explain, UIP is redundant if you have a risk-sharing equation. So I followed that route.
Hope that helps…
Jamie
gali_monacelli.mod (3.72 KB)