Thank you! The steady-state problem is exactly the problem I keep facing. Analytically, yes, the steady-state values of each Bond (Bi, Bj) are zero and that is what I have been using to test my dynare program most recently. I am using Fsolve in another program to recover the steady-state values of the four M variables. What I think might be one problem I have is the initial value to use for consumption, which falls out of the steady state Euler. Specifying the initial values seems like a common problem–how does one go about identifying such values which solve the global optimum?
I would definitely prefer to take an analytical approach to define the steady-state, but it seems that the four simultaneous money demand functions require a fixed point solution.
The equation for Bj there, ironically, includes an external debt elastic interest rate for country j–which I included specifically as a means to address the unit root/nonstationary problem. The full equation for Bj is:
I have been assuming Bj=0 for simplicity in tests, but the literature seems to suggest that EDEIR interest rates in this form should allow a steady state level of debt that is non-zero.
I have most recently tried a model without shocks (output is constant) to see where the problem equations are. I have defined my inflation variables via the Euler equations, and these seem to be where the problem is–since pi is the only variable related to consumption, I am wondering if this goes back to the way I set my initial values for consumption. Can you recommend a resource to learn about finding the global optimum in this kind of setting? I’m referring to this earlier post: How do solve the initialization problem?
Residuals of the static equations:
Equation number 1 : 0.46052 : ci
Equation number 2 : 0.46052 : cj
Equation number 3 : 0.014585 : pi_i
Equation number 4 : 0.014585 : pi_j
Equation number 5 : -8.1633e-06 : ri
Equation number 6 : 0 : rj
Equation number 7 : 0 : 7
Equation number 8 : 0 : 8
Equation number 9 : 0 : 9
Equation number 10 : 0 : 10
Equation number 11 : 0 : bi
Equation number 12 : 0 : bj
Equation number 13 : 0 : ee
Error using print_info (line 32)
Impossible to find the steady state (the sum of square residuals of the static equations is 0.4246). Either the model doesn’t have a steady state, there are an
infinity of steady states, or the guess values are too far from the solution
test7.mod (1.4 KB)
Thank you for maintaining this forum–I have found it incredibly useful for learning about modeling. Hitting this problem and searching for solutions has made me realize I probably need to explore an alternative second- or third-order approximation approach a la Devereux and Sutherland (2006/2009/2010/2011). If you have any suggestions about resources beyond their papers to learn about incomplete markets/portfolio problems, I would love to hear them. Thank you!