I am trying a income fluctuation problem with stochastic volatility in income and CRRA preferences. The income process is as:

Y = (1-rhoy)* muy + rhoy*Y(-1) + voly(-1) ey;*voly(-1)+ svoly*evoly;

voly= (1-rhovoly) muvoly + rhovoly

When I change the value of risk aversion to higher values like 30 or above, I keep running into 0/0 eigenvalue problem. Model diagnosis shows:

MODEL_DIAGNOSTICS: The Jacobian of the static model is singular

MODEL_DIAGNOSTICS: there is 1 colinear relationships between the variables and the equations

Colinear variables:

C

B

R

Colinear equations

1

MODEL_DIAGNOSTICS: The presence of a singularity problem typically indicates that there is one

MODEL_DIAGNOSTICS: redundant equation entered in the model block, while another non-redundant equation

MODEL_DIAGNOSTICS: is missing. The problem often derives from Walras Law.

I looked at the timings of Saving and interest rate. The Euler equation is the only place where the risk aversion parameter enters and equation is very standard. I have tried the model with first order perturbation as well and the same issue persists. Not sure what is going wrong here! Attached is the mod file. Thanks for any insights.cs_sv.mod (944 Bytes)