Two country New Keynesian model

Hi everyone,

I am actually working on a two country NK model. The model is an extension of Gali and Monacelli 2005 paper were I added foreign variables. The main objective is to estimate the model to calibrate it on US data.
I am a little bit concern with the response of the nominal exchange rate, real exchange rate and net export compared to Gali and Monacelli 2005 or the chapter 8 of gali 2015.

1-In fig1, the max nominal appreciation (er) following a positive monetary shock happen later compared to Gali and the real exchange rate (q) response is completely different from the nominal (compared to the co-movement in the data and Gali).
2-In fig2, net export and terms of trade as well as real exchange rate which are real variables does not come back to steady state after the shock.

Since its my first time working on two country model I was wondering what is possibly wrong here? I was expecting the same shape in the response of these variables as in Gali.
For the last concern, do anyone has a suggestion on the the data and observable to use in the estimation to match a domestic economy of the size of the US and a small open foreign economy (Never did estimation before but I am learning with prof @jpfeifer different examples)?

Thank you

testopen.mod (5.0 KB)

fig1.pdf (5.2 KB)
fig2.pdf (2.5 KB)

gali1.pdf (4.6 KB)
gali2.pdf (2.9 KB)

  1. It’s hard to tell what is going on, but a different sign in the real exchange rate response is indeed worrisome.
  2. Variablen not coming back to steady state suggests a unit root. That may give you clue where the mistake could be.