# Two sectors NK model **URL:** \ **Category:** Steady state\ **Created:** [12 November 2020 12:54 UTC](https://forum.dynare.org/t/two-sectors-nk-model/16923 "2020-11-12T12:54:42Z")\ **Posts on this page:** 6\ **Page:** 1
**Author:** ![ManuelG1](https://forum.dynare.org/letter_avatar_proxy/v4/letter/m/50afbb/32.png) [@ManuelG1](https://forum.dynare.org/u/ManuelG1)\ **Post date:** [12 November 2020 12:54 UTC](https://forum.dynare.org/t/two-sectors-nk-model/16923/1 "2020-11-12T12:54:42Z")
Good Afternoon, I am trying to work on a very simple two sectors NK model. Although the external file always finds the SS, I got two main issues I am not sure how to interpret/fix: 1. If the consumption sectoral shares are not equal to the employment sectoral shares one of the static equations displays a residual; 2. The model diagnostic command indicates some colinear relationships among the Taylor rule and the productivity shocks. (The Jacobian of the static model is singular). I thank you in advance for your help. Manuel [Model\_T2\_SS.m](https://forum.dynare.org/uploads/short-url/t3Ic0Frzti0Hk48081MITwphqWY.m) (1.3 KB) [Model\_T2.mod](https://forum.dynare.org/uploads/short-url/fdttPLwaLX87kkySXQTm5LSiDua.mod) (4.2 KB) ---
**Author:** ![jpfeifer](https://forum.dynare.org/user_avatar/forum.dynare.org/jpfeifer/32/5044_2.png) [@jpfeifer](https://forum.dynare.org/u/jpfeifer)\ **Post date:** [12 November 2020 19:25 UTC](https://forum.dynare.org/t/two-sectors-nk-model/16923/2 "2020-11-12T19:25:07Z")
See > [@The Jacobian is singular but Dynare still gives me results](https://forum.dynare.org/t/the-jacobian-is-singular-but-dynare-still-gives-me-results/14874/5): > > Most of the problem comes from your use of log(Phi) = (1-rho\_phi)\*log(STEADY\_STATE(Phi)) + rho\_phi\*log(Phi(-1)) + Eps\_phi; The steady state of Phi cannot be endogenously computed, it seems. If you use log(Phi) = (1-rho\_phi)\*log(varphi) + rho\_phi\*log(Phi(-1)) + Eps\_phi; i.e. replace the steady state operator by the steady state you set in the steady\_state\_model-block, one of the warnings disappears. For the other shock processes, the problem seems to be the same. Fixing this in [Model\_T2.mod](https://forum.dynare.org/uploads/short-url/oI2Ppwmy1AWb1MgKZn5eJA0Zq9d.mod) (4.1 KB) results in only one collinear relationship. Maybe that will help. Could it be that you are trying to pin down nominal levels that are not determinate in NK models? ---
**Author:** ![ManuelG1](https://forum.dynare.org/letter_avatar_proxy/v4/letter/m/50afbb/32.png) [@ManuelG1](https://forum.dynare.org/u/ManuelG1)\ **Post date:** [13 November 2020 09:49 UTC](https://forum.dynare.org/t/two-sectors-nk-model/16923/3 "2020-11-13T09:49:56Z")
Dear Dr. Pfeifer, thanks for your help. I removed the nominal variables by introducing relative prices and the system does not detect colinear relationships any longer. However, I still get the error about one of the eigenvalues being close to 0, although If I run model diagnostic the system says “MODEL\_DIAGNOSTICS: No obvious problems with this mod-file were detected.” Am I still missing something? Thanks [Model\_T4.mod](https://forum.dynare.org/uploads/short-url/1JPTUqjQ1fCt5Wh8AtVvfcODgwC.mod) (4.0 KB) [Model\_T4\_SS.m](https://forum.dynare.org/uploads/short-url/hreuHXNSnw6B95Fxj25lPW7Z7Lt.m) (1.3 KB) ---
**Author:** ![jpfeifer](https://forum.dynare.org/user_avatar/forum.dynare.org/jpfeifer/32/5044_2.png) [@jpfeifer](https://forum.dynare.org/u/jpfeifer)\ **Post date:** [13 November 2020 10:50 UTC](https://forum.dynare.org/t/two-sectors-nk-model/16923/4 "2020-11-13T10:50:06Z")
It seems this is a fundamental problem with your model. Are you sure that what remains determines all variables in the model uniquely? ---
**Author:** ![ManuelG1](https://forum.dynare.org/letter_avatar_proxy/v4/letter/m/50afbb/32.png) [@ManuelG1](https://forum.dynare.org/u/ManuelG1)\ **Post date:** [13 November 2020 15:43 UTC](https://forum.dynare.org/t/two-sectors-nk-model/16923/5 "2020-11-13T15:43:30Z")
It seems I am still missing something. The model now works if I remove the labour market equilibrium equation (h = h1+h2) but this sounds wrong to me. In fact, as soon as I change the calibration (e.g. if the consumption sectoral shares are not equal to the employment sectoral shares) the model stops working since the aggregate wage static equation starts to display a residual when imputing the steady state. Is it maybe that the model can only work if the consumption and employment shares are endogenized? Thank you [Model\_T6\_SS.m](https://forum.dynare.org/uploads/short-url/jAp4bfPsnXPYmkSPwcZw0xKH2Rg.m) (1.3 KB) [Model\_T6.mod](https://forum.dynare.org/uploads/short-url/4A76ISTgJoZJmAzbgg93245CgYV.mod) (4.1 KB) ---
**Author:** ![jpfeifer](https://forum.dynare.org/user_avatar/forum.dynare.org/jpfeifer/32/5044_2.png) [@jpfeifer](https://forum.dynare.org/u/jpfeifer)\ **Post date:** [13 November 2020 17:17 UTC](https://forum.dynare.org/t/two-sectors-nk-model/16923/6 "2020-11-13T17:17:49Z")
I am not familiar with your model, but that may well be the case. After all, wage income should determine your consumption choices.