Non-linear model

[mia-K71]

Hi,

I am trying to build a simple balance sheet model in IRIS. In the model foreign assets (FA) are represented as follows:

FA = FA{-1} + INC + INT; where INC - income from exchange rate changes and interest income, INT - interventions.

INC = (yield + dexchange - 2 )*FA{-1}

INT = res_int;

I model yield and exchange rate changes as AR process (log(yield) = a*log(yield{-1})+ (1-a)log(ss_yield)+res_yield !! yield = ss_yield and log(dexchange) = alog(dexchange{-1})+ (1-a)*log(ss_dexchange)+ res_dexchange !! dexchange = ss_dexchange).

I declare INT (difference between bought and sold currency ) as a log_variable as it can be negative.

However, I am fail to solve this model because of steady state issues. Could you point out what mistakes I'm making? Thank you.

Best,
Mia

[jaromir-benes]

HI Mia The rules for log-linear variables are the following #1 If a variable is growing at a constant rate in steady state (rate of change), it *must* be declared as log-variables #2 if a variable is growing at a constant first difference in steady state, it *must not* be declared as a log variables #3 if a variable is flat in steady state (either stationary or a unit root variables with no growth) you can choose #4 if a variable can flip its sign, it *must not* be declared as a log variable #5 If there is a conflict between #1 and #4, you cannot have that variable directly in the model, and you must create a suitable transformation of that variable, e.g. a ratio over GDP. I guess your case may fall under #5 :) Let me know if this helps. Best Jaromir

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On Mon, Nov 21, 2022 at 11:29 AM mia ***@***.***> wrote: Hi, I am trying to build a simple balance sheet model in IRIS. In the model foreign assets (FA) are represented as follows: FA = FA{-1} + INC + INT; where INC - income from exchange rate changes and interest income, INT - interventions. INC = (yield + dexchange - 2 )*FA{-1} INT = res_int; I model yield and exchange rate changes as AR process (log(yield) = a*log(yield{-1})+ (1-a)*log(ss_yield)+res_yield !! yield = ss_yield and log(dexchange) = a*log(dexchange{-1})+ (1-a)*log(ss_dexchange)+ res_dexchange !! dexchange = ss_dexchange). I declare INT (difference between bought and sold currency ) as a log_variable as it can be negative. However, I am fail to solve this model because of steady state issues. Could you point out what mistakes I'm making? Thank you. Best, Mia — Reply to this email directly, view it on GitHub <#355>, or unsubscribe <https://github.com/notifications/unsubscribe-auth/AGCVKKQBKPKRMDJWYD2QCH3WJNFHBANCNFSM6AAAAAASGPN2YE> . You are receiving this because you are subscribed to this thread.Message ID: ***@***.***>

[mia-K71]

Dear Jaromir,

Thank you for such a quick answer. I want to clarify what I wrote above. I declare INT in the block log_variable !!all but INT.

I tried to model INT as a ratio to GDP and then in the equation of FA put INT_NGDP*NGDP. However, this doesn't help. Maybe I missed something.

Best,
Mia