I have been trying to replicate the open economy model with capital adjustment costs and a PPP exchange rate; Chp 13 - ABCs of RBCs. I can get the model to run but i have two problems.
When the coefficient on P(+1) is 2 (see equation for capital) the infamous BK conditions are not satisfied. However, if i were to change the coefficient to say 1.9, which is approximately equal to 2, or just remove it all together i am able to get a result.
When i do get a result there is an increase in price and a fall in consumption which has implications for the exchange rate and exports; the opposite of what McCandless got. Higher values of kappa do lead to better results, but i cannot arbitrarily increase kappa.
I have attached my .mod file. Any help will be appreciated.
chp13.mod (1.44 KB)