Sorry for asking a beginner’s question. When solving for the steady state, the Euler equation generally implies the steady-state relationship R = 1/beta. However, the conventionally specified Taylor rule has a steady-state form R = R_ss. Therefore, one would calibrate R_ss = 1/beta. But doesn’t doing this make the originally, say, 30-equation, 30-unknown DSGE system become a system with 29 equations and 30 unknowns (because two equations become ‘collinear’)? Then the steady state becomes unsolvable. What should be done in this situation?
What do you mean? If you the R=R_ss you pin down gross inflation at one. After all, the Euler equation implies R/\Pi=1/\beta.