Hi.

I have a Colinarty problem in a DSGE model between two variables namely B and T. Bonds and Tax revenue.I think that I did not include an important equation in the model and I have a redundant equation in the model.When I employ model_diagonistics dynare shows there are collinarity problem between B and T and in some of the equations in the model. I attached dynare codes for more information.

Government budget constraint is:

T_{t}+\frac{B_{t}}{P_{t}}+\frac{M_{t}-M_{t-1}}{P_{t}} = \frac{R_{t-1}^{ n}B_{t-1}}{P_{t}}+G_{t}

\overline T =(\frac{1}{\beta}-1)\overline B +\overline G

I want to define Fiscal policy rule and Tax revenue equasions. I have four new questions but only two new variables in the model and therefore I can not run the model.

T_{t}=\phi_{T}Y_{t}\varepsilon_{t}^{T}

G_{t}=\phi_{G}Y_{t}\varepsilon_{t}^{G}

\varepsilon_{t}^{T} and \varepsilon_{t}^{G} are two AR(1) processes and show Tax revenue shock and government spending shock in the model.

\phi_{G} and \phi_{T} are government spending to GDP ratio and the ratio of tax revenue to GDP. I defined B_{t}=\phi_{b}Y_{t}.In steady state situation we have

\overline B=\phi_{b}\overline Y

\overline G=\phi_{G}\overline Y

I did not include tax revenue equasion in the model.I don’t know what is the main reason of Colinarty problem in dynare ? Unit root ? removing a non-redundant equasion ?

I attached dynare codes.NEWNKDSGE.mod (3.8 KB)