nk_price_wage_stickiness.mod (6.2 KB)
Dear All,
When I solve a New Keynesian DSGE model with price and nominal wage stickiness, it generates correct IRFs to a monetary policy shock up to a second-order approximation. However, when I use a third-order approximation, it generates wrong predictions. For example, output rises in response to the real interest rate increase.
Does anyone know why that might happen?
(I’m using a third-order approximation to generate IRFs to a technology uncertainty shock. I considered a monetary policy shock to check whether IRFs in the simulated model make sense.)
I have attached the code, whose basic structure and equations can also be found on Eric Sim’s page.
I appreciate any comments and help.
Best,