Stationarity of nominal exchange rate in two country DSGE

Hello, I am working on a two country DSGE model on Dynare (two goods, one asset).

I am working on a nonlinear model, and I have eliminated prices for stationarity.

However, the model still seems to be nonstationary because of nominal exchange rate between the two currencies. In that case, how can I fix the problem?

I appreciate your help and advice. Thank you.

DSGE_Corsetti.mod (5.6 KB)

The reference paper here is Schmitt-Grohe/Uribe (2002) Closing Small Open Economy Models | NBER.

They derive a bunch of “tricks” that will eliminiate this problem without altering the model properties significantly :slight_smile:

Thank you for your suggestion! I will look up the paper:)

Best regards,