diff --git a/parser.src/ComputingTasks.cc b/parser.src/ComputingTasks.cc
index 172078c9f..13a8fb5cb 100644
--- a/parser.src/ComputingTasks.cc
+++ b/parser.src/ComputingTasks.cc
@@ -127,7 +127,9 @@ RamseyPolicyStatement::checkPass(ModFileStructure &mod_file_struct)
 {
   mod_file_struct.stoch_simul_or_similar_present = true;
 
-  // Fill in option_order of mod_file_struct
+  /* Fill in option_order of mod_file_struct
+     Since ramsey policy needs one further order of derivation (for example, for 1st order
+     approximation, it needs 2nd derivatives), we add 1 to the order declared by user */
   OptionsList::num_options_type::const_iterator it = options_list.num_options.find("order");
   if (it != options_list.num_options.end())
     mod_file_struct.order_option = atoi(it->second.c_str()) + 1;
diff --git a/parser.src/DataTree.cc b/parser.src/DataTree.cc
index 1e21ba09e..d887eb974 100644
--- a/parser.src/DataTree.cc
+++ b/parser.src/DataTree.cc
@@ -333,11 +333,11 @@ DataTree::AddLocalParameter(const string &name, NodeID value) throw (LocalParame
   int id = symbol_table.getID(name);
 
   // Throw an exception if symbol already declared
-  map<int, NodeID>::iterator it = local_parameters_table.find(id);
-  if (it != local_parameters_table.end())
+  map<int, NodeID>::iterator it = local_variables_table.find(id);
+  if (it != local_variables_table.end())
     throw LocalParameterException(name);
 
-  local_parameters_table[id] = value;
+  local_variables_table[id] = value;
 }
 
 NodeID
diff --git a/parser.src/DynareBison.cc b/parser.src/DynareBison.cc
index c7d6c71c1..f7275d4a9 100644
--- a/parser.src/DynareBison.cc
+++ b/parser.src/DynareBison.cc
@@ -889,7 +889,7 @@ namespace yy
 
   case 159:
 #line 421 "DynareBison.yy"
-    {driver.declare_and_init_local_parameter((yysemantic_stack_[(5) - (2)].string_val), (yysemantic_stack_[(5) - (4)].node_val));;}
+    {driver.declare_and_init_model_local_variable((yysemantic_stack_[(5) - (2)].string_val), (yysemantic_stack_[(5) - (4)].node_val));;}
     break;
 
   case 160:
diff --git a/parser.src/DynareBison.yy b/parser.src/DynareBison.yy
index ceee068c8..bb561d86f 100644
--- a/parser.src/DynareBison.yy
+++ b/parser.src/DynareBison.yy
@@ -418,7 +418,7 @@ cutoff
 	;
 	
  pound_expression: '#' NAME EQUAL hand_side ';'
-                   {driver.declare_and_init_local_parameter($2, $4);}
+                   {driver.declare_and_init_model_local_variable($2, $4);}
 
  model_var
  	: NAME 
diff --git a/parser.src/DynareFlex.ll b/parser.src/DynareFlex.ll
index 5218d277b..e14a2986d 100644
--- a/parser.src/DynareFlex.ll
+++ b/parser.src/DynareFlex.ll
@@ -262,11 +262,12 @@ int sigma_e = 0;
   return token::INT_NUMBER;
 }
    	
- /* an instruction starting with a recognized symbol is passed as NAME,
+ /* an instruction starting with a recognized symbol (which is not a modfile local variable)
+    is passed as NAME,
     otherwise it is a native statement until the end of the line
  */
 <INITIAL>[A-Za-z_][A-Za-z0-9_]* {	      
-  if (driver.exists_symbol(yytext))
+  if (driver.symbol_exists_and_is_not_modfile_local_variable(yytext))
     {
       BEGIN DYNARE_STATEMENT;
       yylval->string_val = new string(yytext);
diff --git a/parser.src/ExprNode.cc b/parser.src/ExprNode.cc
index 4f0c20a8d..9b808e657 100644
--- a/parser.src/ExprNode.cc
+++ b/parser.src/ExprNode.cc
@@ -162,9 +162,12 @@ VariableNode::VariableNode(DataTree &datatree_arg, int symb_id_arg, Type type_ar
     case eParameter:
       // All derivatives are null, do nothing
       break;
-    case eLocalParameter:
+    case eModelLocalVariable:
       // Non null derivatives are those of the value of the local parameter
-      non_null_derivatives = datatree.local_parameters_table[symb_id]->non_null_derivatives;
+      non_null_derivatives = datatree.local_variables_table[symb_id]->non_null_derivatives;
+      break;
+    case eModFileLocalVariable:
+      // Such a variable is never derived
       break;
     }
 }
@@ -184,8 +187,11 @@ VariableNode::computeDerivative(int varID)
         return datatree.Zero;
     case eParameter:
       return datatree.Zero;
-    case eLocalParameter:
-      return datatree.local_parameters_table[symb_id]->getDerivative(varID);
+    case eModelLocalVariable:
+      return datatree.local_variables_table[symb_id]->getDerivative(varID);
+    case eModFileLocalVariable:
+      cerr << "ModFileLocalVariable is not derivable" << endl;
+      exit(-1);
     }
   cerr << "Impossible case!" << endl;
   exit(-1);
@@ -216,8 +222,9 @@ VariableNode::writeOutput(ostream &output, ExprNodeOutputType output_type,
         output << "params" << LPAR(output_type) << symb_id + OFFSET(output_type) << RPAR(output_type);
       break;
 
-    case eLocalParameter:
-      output << datatree.symbol_table.getNameByID(eLocalParameter, symb_id);
+    case eModelLocalVariable:
+    case eModFileLocalVariable:
+      output << datatree.symbol_table.getNameByID(type, symb_id);
       break;
 
     case eEndogenous:
diff --git a/parser.src/ModelTree.cc b/parser.src/ModelTree.cc
index 59a0534f0..f133cd099 100644
--- a/parser.src/ModelTree.cc
+++ b/parser.src/ModelTree.cc
@@ -164,14 +164,14 @@ ModelTree::writeTemporaryTerms(ostream &output, ExprNodeOutputType output_type)
 }
 
 void
-ModelTree::writeLocalParameters(ostream &output, ExprNodeOutputType output_type) const
+ModelTree::writeModelLocalVariables(ostream &output, ExprNodeOutputType output_type) const
 {
-  for(map<int, NodeID>::const_iterator it = local_parameters_table.begin();
-      it != local_parameters_table.end(); it++)
+  for(map<int, NodeID>::const_iterator it = local_variables_table.begin();
+      it != local_variables_table.end(); it++)
     {
       int id = it->first;
       NodeID value = it->second;
-      output << symbol_table.getNameByID(eLocalParameter, id) << " = ";
+      output << symbol_table.getNameByID(eModelLocalVariable, id) << " = ";
       // Use an empty set for the temporary terms
       value->writeOutput(output, output_type, temporary_terms_type());
       output << ";" << endl;
@@ -692,7 +692,7 @@ ModelTree::writeStaticModel(ostream &StaticOutput) const
 
   ExprNodeOutputType output_type = (mode == eDLLMode ? oCStaticModel : oMatlabStaticModel);
 
-  writeLocalParameters(model_output, output_type);
+  writeModelLocalVariables(model_output, output_type);
 
   writeTemporaryTerms(model_output, output_type);
 
@@ -973,7 +973,7 @@ ModelTree::writeSparseDLLDynamicCFileAndBinFile(const string &dynamic_basename,
     }
   mDynamicModelFile << "//#define DEBUG\n";
 
-  writeLocalParameters(mDynamicModelFile, oCDynamicModelSparseDLL);
+  writeModelLocalVariables(mDynamicModelFile, oCDynamicModelSparseDLL);
 
   writeModelEquationsOrdered(mDynamicModelFile, block_triangular.ModelBlock);
 
@@ -1521,7 +1521,7 @@ ModelTree::writeDynamicModel(ostream &DynamicOutput) const
 
   ExprNodeOutputType output_type = (mode == eStandardMode ? oMatlabDynamicModel : oCDynamicModel);
 
-  writeLocalParameters(model_output, output_type);
+  writeModelLocalVariables(model_output, output_type);
 
   writeTemporaryTerms(model_output, output_type);
 
diff --git a/parser.src/ParsingDriver.cc b/parser.src/ParsingDriver.cc
index 5a2f7fe06..d4510ea1e 100644
--- a/parser.src/ParsingDriver.cc
+++ b/parser.src/ParsingDriver.cc
@@ -10,9 +10,12 @@ ParsingDriver::~ParsingDriver()
 }
 
 bool
-ParsingDriver::exists_symbol(const char *s)
+ParsingDriver::symbol_exists_and_is_not_modfile_local_variable(const char *s)
 {
-  return mod_file->symbol_table.Exist(s);
+  if (!mod_file->symbol_table.Exist(s))
+    return false;
+
+  return(mod_file->symbol_table.getType(s) != eModFileLocalVariable);
 }
 
 void
@@ -120,6 +123,10 @@ ParsingDriver::add_model_variable(string *name)
   NodeID id = model_tree->AddVariable(*name);
 
   Type type = mod_file->symbol_table.getType(*name);
+
+  if (type == eModFileLocalVariable)
+    error("Variable " + *name + " not allowed inside model declaration. Its scope is only outside model.");
+
   if ((type == eEndogenous) && (model_tree->mode == eSparseDLLMode))
     {
       int ID = mod_file->symbol_table.getID(*name);
@@ -137,6 +144,9 @@ ParsingDriver::add_model_variable(string *name, string *olag)
   Type type = mod_file->symbol_table.getType(*name);
   int lag = atoi(olag->c_str());
 
+  if (type == eModFileLocalVariable)
+    error("Variable " + *name + " not allowed inside model declaration. Its scope is only outside model.");
+
   if ((type == eExogenous) && lag != 0)
     {
       cout << "Warning: exogenous variable "
@@ -156,7 +166,10 @@ ParsingDriver::add_model_variable(string *name, string *olag)
 NodeID
 ParsingDriver::add_expression_variable(string *name)
 {
-  check_symbol_existence(*name);
+  // If symbol doesn't exist, then declare it as a mod file local variable
+  if (!mod_file->symbol_table.Exist(*name))
+    mod_file->symbol_table.AddSymbolDeclar(*name, eModFileLocalVariable, *name);
+
   NodeID id = data_tree->AddVariable(*name);
 
   delete name;
@@ -985,9 +998,9 @@ ParsingDriver::add_model_equal_with_zero_rhs(NodeID arg)
 }
 
 void
-ParsingDriver::declare_and_init_local_parameter(string *name, NodeID rhs)
+ParsingDriver::declare_and_init_model_local_variable(string *name, NodeID rhs)
 {
-  mod_file->symbol_table.AddSymbolDeclar(*name, eLocalParameter, *name);
+  mod_file->symbol_table.AddSymbolDeclar(*name, eModelLocalVariable, *name);
   try
     {
       model_tree->AddLocalParameter(*name, rhs);
diff --git a/parser.src/SymbolTable.cc b/parser.src/SymbolTable.cc
index cd4b18604..a8f409559 100644
--- a/parser.src/SymbolTable.cc
+++ b/parser.src/SymbolTable.cc
@@ -13,7 +13,8 @@
 using namespace std;
 
 SymbolTable::SymbolTable() : endo_nbr(0), exo_nbr(0), exo_det_nbr(0), parameter_nbr(0),
-                             local_parameter_nbr(0), recur_nbr(0)
+                             model_local_variable_nbr(0), modfile_local_variable_nbr(0),
+                             recur_nbr(0)
 {
   name_table.resize(20);
   tex_name_table.resize(20);
@@ -43,14 +44,15 @@ int SymbolTable::AddSymbol(string name,Type type, string tex_name)
     case eRecursiveVariable:
       symboltable[name].id = recur_nbr;
       return recur_nbr++;
-    case eLocalParameter:
-      symboltable[name].id = local_parameter_nbr;
-      return local_parameter_nbr++;
-    default:
-      // should never happen
-      return -1;
+    case eModelLocalVariable:
+      symboltable[name].id = model_local_variable_nbr;
+      return model_local_variable_nbr++;
+    case eModFileLocalVariable:
+      symboltable[name].id = modfile_local_variable_nbr;
+      return modfile_local_variable_nbr++;
     }
-
+  // should never happen
+  return -1;
 }
 
 int SymbolTable::AddSymbolDeclar(string name,Type type, string tex_name)
diff --git a/parser.src/include/DataTree.hh b/parser.src/include/DataTree.hh
index a986592ee..79ccab7d9 100644
--- a/parser.src/include/DataTree.hh
+++ b/parser.src/include/DataTree.hh
@@ -31,8 +31,8 @@ protected:
   //! A counter for filling ExprNode's idx field
   int node_counter;
 
-  //! Stores local parameters value
-  map<int, NodeID> local_parameters_table;
+  //! Stores local variables value
+  map<int, NodeID> local_variables_table;
 
   typedef map<int, NodeID> num_const_node_map_type;
   num_const_node_map_type num_const_node_map;
diff --git a/parser.src/include/ModelTree.hh b/parser.src/include/ModelTree.hh
index 6ae019207..6456b9586 100644
--- a/parser.src/include/ModelTree.hh
+++ b/parser.src/include/ModelTree.hh
@@ -69,9 +69,9 @@ private:
   void computeTemporaryTermsOrdered(int order, Model_Block *ModelBlock);
   //! Writes temporary terms
   void writeTemporaryTerms(ostream &output, ExprNodeOutputType output_type) const;
-  //! Writes local parameters
+  //! Writes model local variables
   /*! No temporary term is used in the output, so that local parameters declarations can be safely put before temporary terms declaration in the output files */
-  void writeLocalParameters(ostream &output, ExprNodeOutputType output_type) const;
+  void writeModelLocalVariables(ostream &output, ExprNodeOutputType output_type) const;
   //! Writes model equations
   void writeModelEquations(ostream &output, ExprNodeOutputType output_type) const;
   //! Writes the static model equations and its derivatives
diff --git a/parser.src/include/ParsingDriver.hh b/parser.src/include/ParsingDriver.hh
index 8752babee..91e10c5f5 100644
--- a/parser.src/include/ParsingDriver.hh
+++ b/parser.src/include/ParsingDriver.hh
@@ -147,8 +147,8 @@ public:
     exit(-1);
   }
 
-  //! Check if a given symbol exists in the parsing context
-  bool exists_symbol(const char *s);
+  //! Check if a given symbol exists in the parsing context, and is not a mod file local variable
+  bool symbol_exists_and_is_not_modfile_local_variable(const char *s);
   //! Sets mode of ModelTree class to use C output
   void use_dll();
   //! Sets mode of ModelTree class to block decompose the model and triggers the creation of the incidence matrix
@@ -166,7 +166,7 @@ public:
   //! Declares a parameter by adding it to SymbolTable
   void declare_parameter(string *name, string *tex_name = new string);
   //! Declares and initializes a local parameter
-  void declare_and_init_local_parameter(string *name, NodeID rhs);
+  void declare_and_init_model_local_variable(string *name, NodeID rhs);
   //! Adds a constant to DataTree
   NodeID add_constant(string *constant);
   //! Adds a model variable to ModelTree and VariableTable
diff --git a/parser.src/include/SymbolTable.hh b/parser.src/include/SymbolTable.hh
index c19b21340..3f5c745bd 100644
--- a/parser.src/include/SymbolTable.hh
+++ b/parser.src/include/SymbolTable.hh
@@ -55,8 +55,10 @@ public :
   int exo_det_nbr;
   //! Number of declared parameters
   int parameter_nbr;
-  //! Number of declared local parameters
-  int local_parameter_nbr;
+  //! Number of declared model local variables
+  int model_local_variable_nbr;
+  //! Number of declared modfile local variables
+  int modfile_local_variable_nbr;
   //! Number of declared recursive variables
   int recur_nbr;
   /*! Pointer to error function of parser class */
diff --git a/parser.src/include/SymbolTableTypes.hh b/parser.src/include/SymbolTableTypes.hh
index 0444b0cac..ccaa23cee 100644
--- a/parser.src/include/SymbolTableTypes.hh
+++ b/parser.src/include/SymbolTableTypes.hh
@@ -9,7 +9,8 @@ enum Type
     eExogenousDet = 2,             //!< Exogenous deterministic (new)
     eRecursiveVariable = 3,        //!< Recursive variable (reserved for future use)
     eParameter = 4,                //!< Parameter
-    eLocalParameter = 10,          //!< Parameter  local to a model
+    eModelLocalVariable = 10,      //!< Local variable whose scope is model (pound expression)
+    eModFileLocalVariable = 11     //!< Local variable whose scope is mod file (model excluded)
   };
 
 //! Symbol reference flag enum