Hi

The central bank sets the policy rate according to:

When we linearize this equation, we get the following equation:

What happens to the effects of the steady-state variables (which are emphasized in the nonlinear equation and the variables come in the form of a gap from steady state

(r(t-1)/**r**)

(pi(t)/**pi**)

(Y(t)/**Y**))?

Your left hand side should have r(t)/r so that both sides of the equation equal 1 when variables equal their steady state values. When Dynare solves the model it will give you the solutions for the variables with ‘hats’ so that you solve for the values around the steady states, whatever they may be.

What do you mean with

?

The steady states matter insofar as expressing something in percentage deviations from steady state requires these values.