I created a model to see how monetary policy reacts with a trade shock. I wanted to do a comparison with a case where we do not have monetary policy and thus the interest rate is stable. I know that in a simple model you cannot simulate that.
I tried that to my model and I see that exists a unit root in that case. I used the qz_criterium so as to solve the problem. My question is if I can trust the graphs associated to this or I should just change the Taylor coefficient to make the comparison I want. (I use a simple Taylor rule)
Thank you for your time,
A lost student.
Sorry, but I don’t understand the second exercise. How do you fix an interest rate? In that case, no unique stable equilibrium exists.
Dear Professor Pfeifer,
Thank you for your reply. I fixed the interest rate equal with the log of beta. I know that this doesn’t work on a simple model since we will have indeterminacy. However, here I had a unit root and I surpassed its “issue” with the qz_criterium. I feel that this is not right but I wanted to hear your opinion.
Finally, I suppose that if we want to make some conclusions about a case where interest rates do not react to inflation we should decrease the parameter for this reaction and compare the graphs. Is this right?
Thank you again.