Hi，

In the sixth page of Iacoviello (2014), when setting the banking sector, the current deposit income paid by banks to residents is R_{H,t-1}D_{t-1}, while the current loan income obtained by banks from enterprises is R_{E,t}D_{t-1}. The subscript of the loan interest rate is t, and the subscript of the deposit interest rate is t-1; I did not pay attention to this at first. When I modeled and learned from Iacoviello’s model, the enterprise loan interest rate I used for modeling was R_{E,t-1}, it turns out that ：there are 17 eigenvalue(s) larger than 1 in modulus for 16 forward-looking variable(s)，and the rank condition ISN’T verified!.

When I changed the loan rate from R_{E,t-1} to R_{E,t}, the model worked fine. I would like to know what is the basis and reference for the selection of time subscripts of variables in DSGE modeling, and why it can only be run in Dynare when the subscripts of deposit interest rates and loan interest rates are inconsistent.

I would like to know the reason for the above issue of time subscript changes in interest rate.

Thanks！

Dynare’s timing convention for states is documented in the manual. It should coincide with the notation in the original paper. The timing in the paper is not inconsistent, but rather reflects the assumptions made. The interest rate on deposits is agreed upon in advance, while the return on loans is not.

Thanks for your reply.

I have a question which have confused me for a long time. How did Lacoviello came out the deposit interest rate is set advance, while loan interest rate is not, so that he set the deposit interest rate as RH,t−1Dt−1,and loan interest rate as RE,tDt−1?

Or more specifically, from a modeling perspective, among deposit interest rates, corporate loan interest rates and government loan interest rates, how should we determine which kind of rates are set in the previous period, and which ones are given in the current period?

Thanks for your time and I really hope to get your precious opinion.

These are assumptions made by the modeler. Most loan rates are agreed upon in advance. If you sell a bond with a promised coupons, you know the nominal return today. In contrast, if something is risky, you only know the return in expectations.

Thank you for your reply, I will think about it again.