ABCs of RBCs - Chapter 13


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.

  1. 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.

  2. 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)

You have a unit-root in your system, that’s why you get unstable results. Check your eigenvalues, you always have one eigenvalue that is exactly equal to one. CHeck carefully your first order conditions. Also, you know how predetermined variables have to be entered in Dynare right? If you have capital in time t+1 you need to enter it as K etc.