Hello,

I am trying to run a simplified version of the model by Chen et al. (2012). In basic terms, there are two types of agents. The first type called “u” can buy both short and long-term bonds, but they have to pay a transaction cost to buy the long-term bonds. The second type called “r” can only buy long-term bonds, but don’t have to pay transaction costs. Basically, this modification makes the long-term interest rate matter separately from the short-term.

I am getting a unit root, which is also generating a collinearity between my two consumption variables for the two types of agents. (or is it the other way around?). I am posting the code. I am getting a collinearity between my three euler equations (for short-term bonds, long-term if type “r” and long-term if type “u”) and my gov. budget constraint plus the tax and long-term bond rules and the transaction cost equation. I am not quite sure if there is a misspecification in the model. I would appreciate it if someone can check the code and see if there is something obvious that I have missed.

Code provided in the reply below.

Thanks