2 sector TANK model

General DSGE Modeling
1

Hello! I am trying to write a 2 sector TANK model. One sector has sticky prices with monopolistic competition( Calvo) and the other sector has perfect competition. I have a ricardian agent and a non ricardian agent. I am studying consumption of each sectors by each agent. Should I be dropping one of the budget constraints of the households in my code? If I don’t, I have one extra equation than the number of variables.if I drop the budget constraint of the ricardian agent, I am able to simulate the model in dynare and get the IRFs. But what happens to the profits and bonds, how do I ensure it is the ricardian agents who owns firms and have financial instruments? Also, how do I aggregate the production of the two sectors and what will be my aggregate resource constraint? Is it weird that I am getting IRFs even without having an aggregate production and a resource constraint? Also, what is the explanation for being able to drop one of the budget constraints without affecting the model? I should also mention that I had run a diagnostic and it said I might have a singularity error, there might be one redundant equation and one missing equation and that might be due to Walrus’ law.
I shall be highly grateful for any kind of discussion on my queries.
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2

Hey there.

  1. You don’t necessarily have to drop one budget constraint. You’re supposed to find the system of equations that will lead you to a steady state solution.
  2. You ensure that Ricardian households are associated with capital and bonds because non-Ricardian…aren’t, as you include their budget constraint in the model.
  3. To get an aggregate resource contraint you should typically start with the households’ budget constraint and try to link it with the government budget constraint and firms’ profit equations but without knowing the exact model you should take my answer with a grain of salt.
  4. As far as the diagnostic you’re talking about, it may be the case that you have two equations that can be combined but you include them both in the model block in place of an equation you choose to leave out.

Hope this helps

3

In principle, you should always have an extra equation due to Walras Law, if n-1 markets clear, budget constraint implies nth market equilibrium.

You should always make sure Walras Law holds in your model, check that your equations should imply the one you leave out