The confusion of Taylor rule

General DSGE Modeling
1

Hi everyone!
I am fell confuse about my taylor rule formular.
I bulid three types of taylor rule, the first one is orginal version, the second one add the variable of exchange rate, and the third one add the variable of foreign interest rate.

The code are as follows:

r_h = rho * r_h(-1) + (1-rho) * phi_r * pi_h + e_r_h;                            %1 orginal
r_h = rho * r_h(-1) + (1-rho) * (phi_r * pi_h + phi_rer * de) + e_r_h;   %2 exchange rate
r_h = rho * r_h(-1) + (1-rho) * (phi_r * pi_h + phi_rf * drf) + e_r_h;     %3 foreign interest rate
drf = r_f - r_f(-1);                                                                                 %3 foreign interest rate

‘phi’ is a parameter, de=e/e(-1), and e is nominal exchange rate. r_f is foreign interest rate.
But I found that there is no difference between the IRF functions under the three types of taylor rules.
Could any one offer me some advice of what’s wrong with my model?
Thank you very much!

Code and the key paper:
Here is my code:
nk2c0105.mod (8.3 KB)
And the code illustrated above is from line 165 to 170.
I add a shock to the foreign interest rate in my two country model.
Here is the orginal paper of my code:
chapter_6(orginal).pdf (481.5 KB)

1 Like
2

Hi unnature,

when I compare the first two Taylor rules I do indeed get different results. They are, however, numerical and maybe not easily visible with eyeballing. You could run the different versions, save the results and compare them to see exactly what I mean. But I think everything should be fine with your code. You can see that the shock is generally not very persistent and de only reacts in the first quarter and than almost not at all.

2 Likes
3

Thank you very much for your reply!
Forgive me for my slow reply, I am considering why the paper I read get completely different result by using different taylor rule which cannot be repeated by my two country model.
Could you please help me check whether the conduction mechanism of IRF is reasonable?
My confusion is that after the foreign interest rate increase, the home country output decrease. is it reansonable for the home country to improve interest rate even in the presence of capital controls?
Thanks for your help!