Dear Christophe.

You may have to adjust your utility function to bring in the money balance (M0/P0). You will find discussion on this in Chapter 4 of Thomas Sargent “Dynamic Macroeconomic Theory,” (1987). Harvard University Press. Chapter 17 of Lars Ljungqvist and Thomas Sargent “Recursive Macroeconomic Theory.” (2000). MIT Press, also has discussions on this matter.

Remember that monetarists are using policy rules rather than discretion. One rule is to keep the growth of money supply in line with growth in productivity. Another intuition would be to set the nominal interest rate to zero, so that inflation = real interest rate. There are some information in Edmund S Phelps. 1973. "Inflation in the Theory of Public Finance." Scandinavian Journal of Economics 75, pp. 67-82 on how government tax revenues will be affected if we set nominal interest rate to zero.

Of course you must have these parameters in your model to play with them.

Check this link out (and i hope it helps)...

http://www.dynare.org/manual/Optimal-policy.html

I have a sequential game with HH , firm , government and central bank and the question is to determine the optimal monetary policy in the presence of fiscal dominance(As an exogenous shock).

Backward reduction:

First CB works as a social planner and decides how to determine optimal monetary policy.(constraints are governments budget constraint and reaction function of HH that is demand for money)

the Agents try to mas their objective function in GE.(Again we use government B.C to determine the trend of debt)

The problem is that I am using government's B.C twice, so in Dynare I get the error that variables are more than equations.

Do you have any solution?