diff --git a/doc/manual/source/the-model-file.rst b/doc/manual/source/the-model-file.rst
index 5bde12c33..92dc4837d 100644
--- a/doc/manual/source/the-model-file.rst
+++ b/doc/manual/source/the-model-file.rst
@@ -8941,11 +8941,6 @@ Optimal policy under commitment (Ramsey)
optimal policy for the first time and committing not to
re-optimize in the future.
- Because it entails computing at least a second order approximation, the
- computation of the planner objective value is skipped with a message when
- the model is too large (more than 180 state variables, including lagged
- Lagrange multipliers).
-
.. command:: ramsey_policy [VARIABLE_NAME...];
ramsey_policy (OPTIONS...) [VARIABLE_NAME...];
@@ -9030,8 +9025,9 @@ Optimal policy under discretion
under discretion. The algorithm implemented is essentially an LQ
solver, and is described by *Dennis (2007)*.
- You should ensure that your model is linear and your objective is
- quadratic. Also, you should set the ``linear`` option of the
+ You must ensure that your objective is quadratic. Regarding the model, it must
+ either be linear or solved at first order with an analytical steady state provided.
+ In the first case, you should set the ``linear`` option of the
``model`` block.
It is possible to use the :comm:`estimation` command after the
diff --git a/matlab/discretionary_policy/discretionary_policy.m b/matlab/discretionary_policy/discretionary_policy.m
index b2c67403d..e89de65d9 100644
--- a/matlab/discretionary_policy/discretionary_policy.m
+++ b/matlab/discretionary_policy/discretionary_policy.m
@@ -36,6 +36,8 @@ options_.discretionary_policy = 1;
options_.order = 1;
[info, oo_, options_, M_] = stoch_simul(M_, options_, oo_, var_list);
+oo_.steady_state = oo_.dr.ys;
+
if ~options_.noprint
disp_steady_state(M_,oo_)
for i=M_.orig_endo_nbr:M_.endo_nbr
@@ -44,7 +46,6 @@ if ~options_.noprint
end
end
end
-
oo_.planner_objective_value = evaluate_planner_objective(M_,options_,oo_);
options_.order = origorder;
diff --git a/matlab/discretionary_policy/discretionary_policy_1.m b/matlab/discretionary_policy/discretionary_policy_1.m
index c5aaa45da..c9424b57d 100644
--- a/matlab/discretionary_policy/discretionary_policy_1.m
+++ b/matlab/discretionary_policy/discretionary_policy_1.m
@@ -41,11 +41,13 @@ beta = get_optimal_policy_discount_factor(M_.params, M_.param_names);
%call steady_state_file if present to update parameters
if options_.steadystate_flag
% explicit steady state file
- [~,M_.params,info] = evaluate_steady_state_file(oo_.steady_state,[oo_.exo_steady_state; oo_.exo_det_steady_state],M_, ...
+ [ys,M_.params,info] = evaluate_steady_state_file(oo_.steady_state,[oo_.exo_steady_state; oo_.exo_det_steady_state],M_, ...
options_,false);
if info(1)
return;
end
+else
+ ys=zeros(M_.endo_nbr,1);
end
[U,Uy,W] = feval([M_.fname,'.objective.static'],zeros(M_.endo_nbr,1),[], M_.params);
if any(any(isnan(Uy)))
@@ -73,8 +75,10 @@ W=reshape(W,M_.endo_nbr,M_.endo_nbr);
klen = M_.maximum_lag + M_.maximum_lead + 1;
iyv=M_.lead_lag_incidence';
% Find the jacobian
-z = repmat(zeros(M_.endo_nbr,1),1,klen);
-z = z(nonzeros(iyv)) ;
+z = repmat(ys,1,klen);
+iyr0 = find(iyv(:)) ;
+
+z = z(iyr0);
it_ = M_.maximum_lag + 1 ;
if M_.exo_nbr == 0
@@ -82,10 +86,10 @@ if M_.exo_nbr == 0
end
[junk,jacobia_] = feval([M_.fname '.dynamic'],z, [zeros(size(oo_.exo_simul)) ...
- oo_.exo_det_simul], M_.params, zeros(M_.endo_nbr,1), it_);
-if any(junk~=0)
- info = 65; %the model must be written in deviation form and not have constant terms
- return;
+ oo_.exo_det_simul], M_.params, ys, it_);
+if max(abs(junk))>options_.solve_tolf
+ info = 65; %the model must be written in deviation form and not have constant terms or have a steady state provided
+ return;
end
Indices={'lag','contemp','lead'};
@@ -116,10 +120,12 @@ else
end
%write back solution to dr
-dr.ys =zeros(M_.endo_nbr,1);
+dr.ys =ys;
dr=set_state_space(dr,M_,options_);
T=H(dr.order_var,dr.order_var);
dr.ghu=G(dr.order_var,:);
-Selection=M_.lead_lag_incidence(1,dr.order_var)>0;%select state variables
+if M_.maximum_endo_lag
+ Selection=M_.lead_lag_incidence(1,dr.order_var)>0;%select state variables
+end
dr.ghx=T(:,Selection);
oo_.dr = dr;
diff --git a/matlab/evaluate_planner_objective.m b/matlab/evaluate_planner_objective.m
index 63ec0ab6a..a6df35326 100644
--- a/matlab/evaluate_planner_objective.m
+++ b/matlab/evaluate_planner_objective.m
@@ -37,11 +37,6 @@ dr = oo.dr;
exo_nbr = M.exo_nbr;
nstatic = M.nstatic;
nspred = M.nspred;
-if nspred > 180
- fprintf('\nevaluate_planner_objective: model too large, can''t evaluate planner objective\n')
- planner_objective_value = NaN;
- return
-end
beta = get_optimal_policy_discount_factor(M.params, M.param_names);
Gy = dr.ghx(nstatic+(1:nspred),:);
@@ -64,7 +59,13 @@ Uyygygu = A_times_B_kronecker_C(Uyy,gy,gu);
Wbar =U/(1-beta); %steady state welfare
Wy = Uy*gy/(eye(nspred)-beta*Gy);
Wu = Uy*gu+beta*Wy*Gu;
-Wyy = Uyygygy/(eye(nspred*nspred)-beta*kron(Gy,Gy));
+% Wyy = Uyygygy/(eye(nspred*nspred)-beta*kron(Gy,Gy)); %solve Wyy=Uyy*kron(gy,gy)+beta*Wyy*kron(Gy,Gy)
+if isempty(options.qz_criterium)
+ options.qz_criterium = 1+1e-6;
+end
+%solve Lyapunuv equation Wyy=gy'*Uyy*gy+beta*Gy'Wyy*Gy
+Wyy = reshape(lyapunov_symm(sqrt(beta)*Gy',reshape(Uyygygy,nspred,nspred),options.lyapunov_fixed_point_tol,options.qz_criterium,options.lyapunov_complex_threshold, 3, options.debug),1,nspred*nspred);
+
Wyygugu = A_times_B_kronecker_C(Wyy,Gu,Gu);
Wyygygu = A_times_B_kronecker_C(Wyy,Gy,Gu);
Wuu = Uyygugu+beta*Wyygugu;
diff --git a/matlab/get_error_message.m b/matlab/get_error_message.m
index c4ed1148a..8ba23678e 100644
--- a/matlab/get_error_message.m
+++ b/matlab/get_error_message.m
@@ -122,7 +122,7 @@ switch info(1)
case 64
message = 'discretionary_policy: the derivatives of the objective function contain NaN.';
case 65
- message = 'discretionary_policy: the model must be written in deviation form and not have constant terms.';
+ message = 'discretionary_policy: the model must be written in deviation form and not have constant terms or an analytical steady state meeds to be provided.';
case 66
message = 'discretionary_policy: the objective function must have zero first order derivatives.';
case 71
diff --git a/matlab/stoch_simul.m b/matlab/stoch_simul.m
index a7f10fd01..218d08179 100644
--- a/matlab/stoch_simul.m
+++ b/matlab/stoch_simul.m
@@ -79,7 +79,7 @@ oo_.dr=set_state_space(dr,M_,options_);
if PI_PCL_solver
[oo_.dr, info] = PCL_resol(oo_.steady_state,0);
elseif options_.discretionary_policy
- if ~options_.linear
+ if ~options_.order==1
error('discretionary_policy: only linear-quadratic problems can be solved');
end
[~,info,M_,options_,oo_] = discretionary_policy_1(options_.instruments,M_,options_,oo_);
diff --git a/tests/Makefile.am b/tests/Makefile.am
index 3fdbcb9e6..fd050916a 100644
--- a/tests/Makefile.am
+++ b/tests/Makefile.am
@@ -114,6 +114,8 @@ MODFILES = \
discretionary_policy/dennis_1.mod \
discretionary_policy/dennis_1_estim.mod \
discretionary_policy/Gali_discretion.mod \
+ discretionary_policy/Gali_2015_chapter_3.mod \
+ discretionary_policy/Gali_2015_chapter_3_nonlinear.mod \
histval_initval_file/ramst_initval_file.mod \
histval_initval_file/ramst_data.mod \
histval_initval_file/ramst_datafile.mod \
@@ -646,7 +648,8 @@ lmmcp/sw_newton.o.trs: lmmcp/sw_lmmcp.o.trs
discretionary_policy/dennis_1_estim.m.trs: discretionary_policy/dennis_1.m.trs
discretionary_policy/dennis_1_estim.o.trs: discretionary_policy/dennis_1.o.trs
-
+discretionary_policy/Gali_2015_chapter_3_nonlinear.m.trs: discretionary_policy/Gali_2015_chapter_3.m.trs
+discretionary_policy/Gali_2015_chapter_3_nonlinear.o.trs: discretionary_policy/Gali_2015_chapter_3.o.trs
observation_trends_and_prefiltering/MCMC: m/observation_trends_and_prefiltering/MCMC o/observation_trends_and_prefiltering/MCMC
m/observation_trends_and_prefiltering/MCMC: $(patsubst %.mod, %.m.trs, $(filter observation_trends_and_prefiltering/MCMC/%.mod, $(MODFILES)))
diff --git a/tests/discretionary_policy/Gali_2015_chapter_3.mod b/tests/discretionary_policy/Gali_2015_chapter_3.mod
new file mode 100644
index 000000000..ac48a5eee
--- /dev/null
+++ b/tests/discretionary_policy/Gali_2015_chapter_3.mod
@@ -0,0 +1,163 @@
+/*
+ * This file implements the baseline New Keynesian model of Jordi Galí (2015): Monetary Policy, Inflation,
+ * and the Business Cycle, Princeton University Press, Second Edition, Chapter 3
+ *
+ * THIS MOD-FILE REQUIRES DYNARE 4.5 OR HIGHER
+ *
+ * Notes:
+ * - all model variables are expressed in deviations from steady state, i.e. in contrast to
+ * to the chapter, both the nominal interest rate and natural output are not in log-levels, but rather mean 0
+ *
+ * This implementation was written by Johannes Pfeifer. In case you spot mistakes,
+ * email me at jpfeifer@gmx.de
+ *
+ * Please note that the following copyright notice only applies to this Dynare
+ * implementation of the model.
+ */
+
+/*
+ * Copyright (C) 2016-20 Johannes Pfeifer
+ * Copyright (C) 2020 Dynare Team
+ *
+ * This is free software: you can redistribute it and/or modify
+ * it under the terms of the GNU General Public License as published by
+ * the Free Software Foundation, either version 3 of the License, or
+ * (at your option) any later version.
+ *
+ * It is distributed in the hope that it will be useful,
+ * but WITHOUT ANY WARRANTY; without even the implied warranty of
+ * MERCHANTABILITY or FITNESS FOR A PARTICULAR PURPOSE. See the
+ * GNU General Public License for more details.
+ *
+ * For a copy of the GNU General Public License,
+ * see .
+ */
+
+
+var pi ${\pi}$ (long_name='inflation')
+ y_gap ${\tilde y}$ (long_name='output gap')
+ y_nat ${y^{nat}}$ (long_name='natural output') //(in contrast to the textbook defined in deviation from steady state)
+ y ${y}$ (long_name='output')
+ yhat ${\hat y}$ (long_name='output deviation from steady state')
+ r_nat ${r^{nat}}$ (long_name='natural interest rate')
+ r_real ${r^r}$ (long_name='real interest rate')
+ i ${i}$ (long_name='nominal interrst rate')
+ n ${n}$ (long_name='hours worked')
+ m_real ${m-p}$ (long_name='real money stock')
+ m_growth_ann ${\Delta m}$ (long_name='money growth annualized')
+ m_nominal ${m}$ (long_name='nominal money stock')
+ a ${a}$ (long_name='AR(1) technology shock process')
+ r_real_ann ${r^{r,ann}}$ (long_name='annualized real interest rate')
+ i_ann ${i^{ann}}$ (long_name='annualized nominal interest rate')
+ r_nat_ann ${r^{nat,ann}}$ (long_name='annualized natural interest rate')
+ pi_ann ${\pi^{ann}}$ (long_name='annualized inflation rate')
+ z ${z}$ (long_name='AR(1) preference shock process')
+ p ${p}$ (long_name='price level')
+ w ${w}$ (long_name='nominal wage')
+ c ${c}$ (long_name='consumption')
+ w_real ${\frac{w}{p}}$ (long_name='real wage')
+ mu ${\mu}$ (long_name='markup')
+ mu_hat ${\hat \mu}$ (long_name='markup gap')
+;
+
+varexo eps_a ${\varepsilon_a}$ (long_name='technology shock')
+ eps_z ${\varepsilon_z}$ (long_name='preference shock innovation')
+ ;
+
+parameters alppha ${\alpha}$ (long_name='capital share')
+ betta ${\beta}$ (long_name='discount factor')
+ rho_a ${\rho_a}$ (long_name='autocorrelation technology shock')
+ rho_z ${\rho_{z}}$ (long_name='autocorrelation monetary demand shock')
+ siggma ${\sigma}$ (long_name='inverse EIS')
+ varphi ${\varphi}$ (long_name='inverse Frisch elasticity')
+ phi_pi ${\phi_{\pi}}$ (long_name='inflation feedback Taylor Rule')
+ phi_y ${\phi_{y}}$ (long_name='output feedback Taylor Rule')
+ eta ${\eta}$ (long_name='semi-elasticity of money demand')
+ epsilon ${\epsilon}$ (long_name='demand elasticity')
+ theta ${\theta}$ (long_name='Calvo parameter')
+ ;
+%----------------------------------------------------------------
+% Parametrization, p. 67 and p. 113-115
+%----------------------------------------------------------------
+siggma = 1;
+varphi=5;
+phi_pi = 1.5;
+phi_y = 0.125;
+theta=3/4;
+rho_z = 0.5;
+rho_a = 0.9;
+betta = 0.99;
+eta =3.77; %footnote 11, p. 115
+alppha=1/4;
+epsilon=9;
+
+%----------------------------------------------------------------
+% First Order Conditions
+%----------------------------------------------------------------
+
+model(linear);
+//Composite parameters
+#Omega=(1-alppha)/(1-alppha+alppha*epsilon); %defined on page 60
+#psi_n_ya=(1+varphi)/(siggma*(1-alppha)+varphi+alppha); %defined on page 62
+#lambda=(1-theta)*(1-betta*theta)/theta*Omega; %defined on page 61
+#kappa=lambda*(siggma+(varphi+alppha)/(1-alppha)); %defined on page 63
+[name='New Keynesian Phillips Curve eq. (22)']
+pi=betta*pi(+1)+kappa*y_gap;
+[name='Dynamic IS Curve eq. (23)']
+y_gap=-1/siggma*(i-pi(+1)-r_nat)+y_gap(+1);
+[name='Definition natural rate of interest eq. (24)']
+r_nat=-siggma*psi_n_ya*(1-rho_a)*a+(1-rho_z)*z;
+[name='Definition real interest rate']
+r_real=i-pi(+1);
+[name='Definition natural output, eq. (20)']
+y_nat=psi_n_ya*a;
+[name='Definition output gap']
+y_gap=y-y_nat;
+[name='TFP shock']
+a=rho_a*a(-1)+eps_a;
+[name='Production function (eq. 14)']
+y=a+(1-alppha)*n;
+[name='Preference shock, p. 54']
+z = rho_z*z(-1) - eps_z;
+[name='Money growth (derived from eq. (4))']
+m_growth_ann=4*(y-y(-1)-eta*(i-i(-1))+pi);
+[name='Real money demand (eq. 4)']
+m_real=y-eta*i;
+[name='Annualized nominal interest rate']
+i_ann=4*i;
+[name='Annualized real interest rate']
+r_real_ann=4*r_real;
+[name='Annualized natural interest rate']
+r_nat_ann=4*r_nat;
+[name='Annualized inflation']
+pi_ann=4*pi;
+[name='Output deviation from steady state']
+yhat=y-steady_state(y);
+[name='Definition price level']
+pi=p-p(-1);
+[name='resource constraint, eq. (12)']
+y=c;
+[name='FOC labor, eq. (2)']
+w-p=siggma*c+varphi*n;
+[name='definition real wage']
+w_real=w-p;
+[name='definition nominal money stock']
+m_nominal=m_real+p;
+[name='average price markup, eq. (18)']
+mu=-(siggma+(varphi+alppha)/(1-alppha))*y+(1+varphi)/(1-alppha)*a;
+[name='average price markup, eq. (20)']
+mu_hat=-(siggma+(varphi+alppha)/(1-alppha))*y_gap;
+end;
+
+
+%----------------------------------------------------------------
+% define shock variances
+%---------------------------------------------------------------
+shocks;
+var eps_a = 0.5^2; //unit shock to preferences
+end;
+
+planner_objective 0.5*((siggma+(varphi+alppha)/(1-alppha))*yhat^2+epsilon/0.0215*pi^2)/100;
+discretionary_policy(instruments=(i),irf=20,planner_discount=betta, periods=0) y_gap pi_ann y n w_real p yhat;
+
+
diff --git a/tests/discretionary_policy/Gali_2015_chapter_3_nonlinear.mod b/tests/discretionary_policy/Gali_2015_chapter_3_nonlinear.mod
new file mode 100644
index 000000000..d9153977c
--- /dev/null
+++ b/tests/discretionary_policy/Gali_2015_chapter_3_nonlinear.mod
@@ -0,0 +1,229 @@
+/*
+ * This file implements the baseline New Keynesian model of Jordi Galí (2015): Monetary Policy, Inflation,
+ * and the Business Cycle, Princeton University Press, Second Edition, Chapter 3
+ *
+ * Note that this mod-file implements the non-linear first order conditions and that the IRFs show the log-deviations
+ * from steady state.
+ *
+ * THIS MOD-FILE REQUIRES DYNARE 4.5 OR HIGHER
+ *
+ * Notes:
+ * - in the LOM for the discount rate shock z the shock enters with a minus sign in this mod-file to generate the
+ * IRF to a -0.5% shock
+ *
+ * This implementation was written by Johannes Pfeifer. In case you spot mistakes,
+ * email me at jpfeifer@gmx.de
+ *
+ * Please note that the following copyright notice only applies to this Dynare
+ * implementation of the model.
+ */
+
+/*
+ * Copyright (C) 2016-20 Johannes Pfeifer
+ * Copyright (C) 2020 Dynare Team
+ *
+ * This is free software: you can redistribute it and/or modify
+ * it under the terms of the GNU General Public License as published by
+ * the Free Software Foundation, either version 3 of the License, or
+ * (at your option) any later version.
+ *
+ * It is distributed in the hope that it will be useful,
+ * but WITHOUT ANY WARRANTY; without even the implied warranty of
+ * MERCHANTABILITY or FITNESS FOR A PARTICULAR PURPOSE. See the
+ * GNU General Public License for more details.
+ *
+ * For a copy of the GNU General Public License,
+ * see .
+ */
+
+var C ${C}$ (long_name='Consumption')
+ W_real ${\frac{W}{P}}$ (long_name='Real Wage')
+ Pi ${\Pi}$ (long_name='inflation')
+ A ${A}$ (long_name='AR(1) technology process')
+ N ${N}$ (long_name='Hours worked')
+ R ${R^n}$ (long_name='Nominal Interest Rate')
+ realinterest ${R^{r}}$ (long_name='Real Interest Rate')
+ Y ${Y}$ (long_name='Output')
+ Q ${Q}$ (long_name='Bond price')
+ Z ${Z}$ (long_name='AR(1) preference shock process')
+ S ${S}$ (long_name='Price dispersion')
+ Pi_star ${\Pi^*}$ (long_name='Optimal reset price')
+ x_aux_1 ${x_1}$ (long_name='aux. var. 1 recursive price setting')
+ x_aux_2 ${x_2}$ (long_name='aux. var. 2 recursive price setting')
+ MC ${mc}$ (long_name='real marginal costs')
+ M_real ${M/P}$ (long_name='real money stock')
+ i_ann ${i^{ann}}$ (long_name='annualized nominal interest rate')
+ pi_ann ${\pi^{ann}}$ (long_name='annualized inflation rate')
+ r_real_ann ${r^{r,ann}}$ (long_name='annualized real interest rate')
+ P ${P}$ (long_name='price level')
+ log_m_nominal ${log(M)}$ (long_name='log nominal money stock')
+ log_y ${log(Y)}$ (long_name='log output')
+ log_W_real ${log(W/P)}$ (long_name='log real wage')
+ log_N ${log(N)}$ (long_name='log hours')
+ log_P ${log(P)}$ (long_name='log price level')
+ log_A ${log(A)}$ (long_name='log technology level')
+ log_Z ${log(Z)}$ (long_name='log preference shock')
+ y_hat
+ pi
+ ;
+
+varexo eps_a ${\varepsilon_a}$ (long_name='technology shock')
+ eps_z ${\varepsilon_z}$ (long_name='preference shock')
+ ;
+
+parameters alppha ${\alpha}$ (long_name='capital share')
+ betta ${\beta}$ (long_name='discount factor')
+ rho_a ${\rho_a}$ (long_name='autocorrelation technology shock')
+ rho_z ${\rho_{z}}$ (long_name='autocorrelation monetary demand shock')
+ siggma ${\sigma}$ (long_name='inverse EIS')
+ varphi ${\varphi}$ (long_name='inverse Frisch elasticity')
+ phi_pi ${\phi_{\pi}}$ (long_name='inflation feedback Taylor Rule')
+ phi_y ${\phi_{y}}$ (long_name='output feedback Taylor Rule')
+ eta ${\eta}$ (long_name='semi-elasticity of money demand')
+ epsilon ${\epsilon}$ (long_name='demand elasticity')
+ theta ${\theta}$ (long_name='Calvo parameter')
+ tau ${\tau}$ (long_name='labor subsidy')
+ ;
+
+%----------------------------------------------------------------
+% Parametrization, p. 67 and p. 113-115
+%----------------------------------------------------------------
+siggma = 1;
+varphi=5;
+phi_pi = 1.5;
+phi_y = 0.125;
+theta=3/4;
+rho_z = 0.5;
+rho_a = 0.9;
+betta = 0.99;
+eta =3.77; %footnote 11, p. 115
+alppha=1/4;
+epsilon=9;
+tau=0; //1/epsilon;
+
+%----------------------------------------------------------------
+% First Order Conditions
+%----------------------------------------------------------------
+
+model;
+ [name='FOC Wages, eq. (2)']
+ W_real=C^siggma*N^varphi;
+ [name='Euler equation eq. (3)']
+ Q=betta*(C(+1)/C)^(-siggma)*(Z(+1)/Z)/Pi(+1);
+ [name='Definition nominal interest rate), p. 22 top']
+ R=1/Q;
+ [name='Aggregate output, above eq. (14)']
+ Y=A*(N/S)^(1-alppha);
+ [name='Definition Real interest rate']
+ R=realinterest*Pi(+1);
+% @#if money_growth_rule==0
+% [name='Monetary Policy Rule, p. 26 bottom/eq. (22)']
+% R=1/betta*Pi^phi_pi*(Y/steady_state(Y))^phi_y;
+% @#endif
+ [name='Market Clearing, eq. (15)']
+ C=Y;
+ [name='Technology Shock, eq. (6)']
+ log(A)=rho_a*log(A(-1))+eps_a;
+ [name='Preference Shock, p.54']
+ log(Z)=rho_z*log(Z(-1))-eps_z;
+ [name='Definition marginal cost']
+ MC=W_real/((1-alppha)*Y/N*S);
+ [name='LOM prices, eq. (7)']
+ 1=theta*Pi^(epsilon-1)+(1-theta)*(Pi_star)^(1-epsilon);
+ [name='LOM price dispersion']
+ S=(1-theta)*Pi_star^(-epsilon/(1-alppha))+theta*Pi^(epsilon/(1-alppha))*S(-1);
+ [name='FOC price setting']
+ Pi_star^(1+epsilon*(alppha/(1-alppha)))=x_aux_1/x_aux_2*(1-tau)*epsilon/(epsilon-1);
+ [name='Auxiliary price setting recursion 1']
+ x_aux_1=Z*C^(-siggma)*Y*MC+betta*theta*Pi(+1)^(epsilon+alppha*epsilon/(1-alppha))*x_aux_1(+1);
+ [name='Auxiliary price setting recursion 2']
+ x_aux_2=Z*C^(-siggma)*Y+betta*theta*Pi(+1)^(epsilon-1)*x_aux_2(+1);
+ [name='Definition log output']
+ log_y = log(Y);
+ [name='Definition log real wage']
+ log_W_real=log(W_real);
+ [name='Definition log hours']
+ log_N=log(N);
+ [name='Annualized inflation']
+ pi_ann=4*log(Pi);
+ [name='Annualized nominal interest rate']
+ i_ann=4*log(R);
+ [name='Annualized real interest rate']
+ r_real_ann=4*log(realinterest);
+ [name='Real money demand, eq. (4)']
+ M_real=Y/R^eta;
+ [name='definition nominal money stock']
+ log_m_nominal=log(M_real*P);
+ [name='Definition price level']
+ Pi=P/P(-1);
+ [name='Definition log price level']
+ log_P=log(P);
+ [name='Definition log TFP']
+ log_A=log(A);
+ [name='Definition log preference']
+ log_Z=log(Z);
+ [mcp='a']
+ y_hat=log(Y)-STEADY_STATE(log(Y));
+
+ pi=log(Pi)-STEADY_STATE(log(Pi));
+end;
+
+%----------------------------------------------------------------
+% Steady state values
+%---------------------------------------------------------------
+
+steady_state_model;
+A=1;
+Z=1;
+S=1;
+Pi_star=1;
+P=1;
+MC=(epsilon-1)/epsilon/(1-tau);
+R=1/betta;
+Pi=1;
+Q=1/R;
+realinterest=R;
+N=((1-alppha)*MC)^(1/((1-siggma)*alppha+varphi+siggma));
+C=A*N^(1-alppha);
+W_real=C^siggma*N^varphi;
+Y=C;
+money_growth=0;
+money_growth_ann=0;
+nu=0;
+x_aux_1=C^(-siggma)*Y*MC/(1-betta*theta*Pi^(epsilon/(1-alppha)));
+x_aux_2=C^(-siggma)*Y/(1-betta*theta*Pi^(epsilon-1));
+log_y = log(Y);
+log_W_real=log(W_real);
+log_N=log(N);
+pi_ann=4*log(Pi);
+i_ann=4*log(R);
+r_real_ann=4*log(realinterest);
+M_real=Y/R^eta;
+log_m_nominal=log(M_real*P);
+log_P=log(P);
+log_A=0;
+log_Z=0;
+end;
+
+%----------------------------------------------------------------
+% define shock variances
+%---------------------------------------------------------------
+
+shocks;
+var eps_a = 0.5^2; //unit shock to preferences
+end;
+
+% steady;
+% check;
+% stoch_simul;
+planner_objective 0.5*((siggma+(varphi+alppha)/(1-alppha))*y_hat^2+epsilon/0.0215*pi^2)/100;
+discretionary_policy(order=1,instruments=(R),irf=20,planner_discount=betta, periods=0) y_hat pi_ann log_y log_N log_W_real log_P;
+
+temp=load('Gali_2015_chapter_3_results.mat');
+if abs(oo_.planner_objective_value-temp.oo_.planner_objective_value)>1e-6
+ warning('Planner objective does not match linear model')
+end
+if max(max(abs([temp.oo_.irfs.y_eps_a; temp.oo_.irfs.w_real_eps_a; temp.oo_.irfs.n_eps_a; temp.oo_.irfs.pi_ann_eps_a]-...
+ [oo_.irfs.log_y_eps_a; oo_.irfs.log_W_real_eps_a; oo_.irfs.log_N_eps_a; oo_.irfs.pi_ann_eps_a])))>1e-6
+ error('Policy is different')
+end
\ No newline at end of file