Why Inflationary reaction to interest rates is under 1 in Taylor rule?

jpmodel5.mod (12.6 KB) jpdat.mod (19.9 KB)
Kotera_Sakai(2018)PPR.pdf (2.9 MB)

Hi, all
First, Thank you for some discussion for running Dynare correctly. Actually, Dynare can run and outputting Posterior Distribution.

However, there is a problem on Theory concerned Tylor policy rule. This is Inflationary reaction to interest rate(phi_r_pi in mod file) must be <1.
I think it is strange in aspect of Taylor rule.
So that I calculated in steady_model by setting phy_r_pi =1, There can check there is not accepted Blanchard-Kahn condition.

Why this incident is appeared?
Anyone knows if you see my file, any comment has, please comment me why that appeared.

And One question to all seeing my question.
The mod file also has one problem. It is not equal between number of shocks and observed variables. So that I cannot run with both of dsge_var and bayesian_irf option.
How to solve that matter, how to correct this?

Thank you.
Kazumi

First of all, I think you should ask your advisor or your professor about this – Dynare is just a tool.
Second, I just have looked at that Taylor rule you put. phi_r_pi being less than 1 is correct in your setting. Your formula is a bit different from the standard form, but after transformation, it’s obvious that phi_r_pi should be less than 1. If that number is 1, you have a unit-root process for nominal interest rate and of course, B-K is violated.

Ask your advisor, your professors, or your coauthors, or read Gali’s book twice.

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Thank you for your opinion!
As about relations between Taylor rules and phi_r_pi<1, I want to some opinion from members of Dynare Forum.
If the program is correct, it s bit argument of Japan’s economy because Some researchers set gamma but some researchers set normal, others set >1,or <1.
Thus, I know more opinion from DSGE-model’s expart.

Thank you for telling me your opinion, wupeifan!

And anyone know about observed variables and shocks, I would like to teach me how to solve them.

You need to approach this more systematically. Changing the interest rate rule mechanically will change the roots of the difference equation so that the model runs. But that does not mean that the model makes sense. In the paper you referenced, the inflation feedback needed to be bigger than 1 in order to satisfy the Taylor principle. For some reason in your model, the feedback must be outside of the usual range. That sounds as if there is a more fundamental problem in your model and changing the interest rule simply looks as if it were the solution.

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