2 sector RBC model

Steady state
1

Hi,

I am currently aiming to replicate a 2 sector RBC model with an environmental externality. More specifically, I want to introduce a carbon price shock, but something prevents Dynare from executing. I receive the following:
Error using lnsrch1
Some element of Newton direction
isn’t finite. Jacobian maybe
singular or there is a problem
with initial values

Without the taxation shock the model is running, so I suspect I did a mistake there. For further reference, the model incorporated financial frictions prior to my adaption.

Woul highly appreciate any help!

Best
noffrc.mod (4.3 KB)

2

At least in your initial values there is an inconsistency of the Rb and Rg not taking depreciation into account. You have them equal to R.

3

Thanks for the fast reply!
Unfortunately, I am not certain though if I understood your comment correctly.

Rg = alpha_g * pg * Yg / Kg + 1 - delta;
Rb = alpha_b * Yb / Kb * (pb - theta_1mu^theta_2-tau_e(1-mu)epsilonYb^(epsilon-1)) + 1 - delta;

In the initival block Rb and Rg are defined like this and since delta is the depreciation rate of capital, I don’t understand how I have them equal to R?

Many thanks again!

4

When I execute your parameter definitions and initval block in Matlab, I get R=Rb=Rg, which cannot be.

5

Thanks for the clarification. I found the error, and adjusted accordingly.
However, there are still some issues, I cannot seem to solve.

Do you mind having another look?

Best regards

noffrc2.mod (4.3 KB)

6

There are still big residuals in the equations for Rb and Rg, so I doubt that the issue has been completely fixed.