I have read many topics about “The rank condition ISN’T verified”. Mostly the problem come from the timing error in the model. I have tried to figure out what the wrong timing in my model is but I cannot find it. Could you help me figure about this? I try to run the model based on Iacoviello (2005) but I change the collateral constraint in entrepreneur that tied to housing to capital instead, and I add capital good producer into my model.
Thank you in advance
test803.mod (3.8 KB)
Most often it’s a timing error. Try to simplify your model.
Dear professor,
Thank you for your reply. I try to run this model with log utility without habit formation in consumption and it works, but it doesn’t work when I add the habit formation. I don’t know whether it is because the habit formation that mess up the model. I already checked the timing in habit formation and I found nothing wrong.
ps. I provide the mod file before habit formation
test8.mod (2.8 KB)
Your model works for lower habit formation values. This suggests that habit formation somehow introduces economic complications.
Thank you very much professor. I tried varying the parameters of habit formation and it works with only low values like you said. After gradually increasing the value, at some points, the IRF starts to have the oscillations until the value is high enough to make the rank condition isn’t verified.
But that should help in getting to the bottom of the economics. Habits for some reason cause oscillations that become explosive.