I would like to ask that why I get a counter-intuitive result when I calculate the welfare in Jermann_Quadrini_2012_RBC.mod? That is, when I set the parameter kappa=0.001 and tau = 0.001 to simulate the welfare in a non-friction scenario, I find that the welfare become smaller than that in the friction scenario. The result, the household get smaller welfare when financial constraint become weaker, is very counter-intuitive. What do you think is the reason for this result.
See the code in attachment.
By the way, whether I set the simulate order =1 or 2, the welfare doesn’t change, why?
Thank you for your answers!
Jermann_Quadrini_2012_RBC.mod (7.5 KB)
I cannot replicate the issue with the correct welfare function at Why do the welfare remain the same whether I set the order to 1 or 2? - #2 by jpfeifer
In that case, unconditional welfare is less negative for small frictions.
Thank you, Prof. Pferfer.
I still have a question.
In the original code, kappa = 0.146 and tau = 0.35. The welfare is about -50.
If I set only the kappa = 0.001, the welfare (I calculate it with “welfare = oo_.mean(23)”) become less negative. This looks like right.
However, if I set kappa = 0.001 and tau = 0.0001, the welfare (about -52) become smaller (more negative) than the original result.
The last situation means there is almost no friction in the model, but I get a lower welfare. I don’t konw the reason behind it.