Dear Dynare users,
It is the first time I run Dynare for the first chapter of my PhD thesis. I develop a two-country model for currency union with unemployment and I want to solve the model in order to observe the IRF’s of a productivity shock in each country.
The result I get is:
‘’ There are 7 eigenvalues larger than 1 in modulus for 7 forward-looking variables, The rank condition ISN’T verified! ‘’
It seems that the necessary condition for uniqueness of a stable equilibrium is satisfied but probably is not a sufficient condition.
as it also says that ‘’ Blanchard Kahn conditions are not satisfied:indeterminacy due to rank failure’’.
I guess this means that the A matrix of the canonical form is not full rank so it is not invertible.
I run the diagnostics and say that there is 1 colinear relationship btw variables and equations, and then it says that 8 out of 12 variables are colinear!!
Notice that I have already log-linearized the equations of the model by hand (in order to observe the proxy of inflation in the New Keynesian Phillips curve) so actually in the model command I type linear and I set initval SS values equal to zero (as it supposed that all of them are logs of numbers smaller than 1). I don’t know if this is relevant to the colinearity problem or not.
I am very confused as I don’t know where the problem is so I don’t know what to do, like:
1)Shall I change the value of the model parameters?
2)Shall I change the specifications of the equations of the model? What is suggested?
3)Shall I change the taylor rule?
4) Shall I log-linearize again? ( I need to do by hand to obtain the proxy of inflation endogenously)
5) Are the colinear relationships obtained because the model is two-country for a currency union, so some relationships are common?
6) Is it a problem of the model? (calculations etc)
Notice that the model from its nature is complicated but i cannot start from a simpler model, as it must have two countries and unemployment.
Please can somebody tell me what to do? ( how to solve this problem or what experienced people mostly do in this case)
If somebody needs to look into my paper, please ask me.