I try to reproduce the results of an small open economy DSGE. Though there are some error in the mod file, there are always 4 unit roots. What differentiates this model is that it contain some foreign price shocks. I see most open economy DSGE contain real shocks, like technological shocks or real demand shocks. I wander if the unit roots problems are caused by the structure of exogenous shocks. So I cut some price shocks. It really reduces unit roots. But I can not cut them all. So I have confidence that the original model on the paper has unit roots.My questions are: 1, Does the unit roots problem matter? 2.Is it possible to use a DSGE model with unit roots to do policy analysis?
model_18.mod (4.87 KB)
The unit roots could come from equations like
They basically look like unit root processes and I wonder if that is desired.
If the unit roots are desired, they pose no problem unless you want to estimate or simulate the model. For IRFs at order=1, this is no problem. See also:
[Exchange rate peg and level irfs)