Hello all,

in my research, I want to solve a medium-sized NK model with active fiscal policy (no feedback of fiscal policy to government debt) and passive monetary policy (Taylor coefficient is set to zero). When I solve the model with “stoch_simul”, everything works fine. For some simulations I need a perfect foresight solution. Yet, when I use a perfect foresight solver (either “simul” or “perfect_foresight_solver”) the model can either be not solved or it can be solved but government debt is non-stationary but exploding. As I reduced the complexity of my model to try and debug it, I found that this problem carries over to the plain vanilla NK model: With active fiscal policy and passive monetary policy, the model can be solved by perturbation but not under perfect foresight.

I attached the code of the version of the plain vanilla NK model which I used. As an example, I use a government expenditure shock. With stoch_simul the model can be solved under active fiscal policy (psitd=0 in the code) and passive monetary policy (theta_phi=0). Yet under perfect foresight, it either can’t be solved (for persistent government spending shocks, i.e., rho_G != 0) or it can be solved (for rho_G=0) but in this case, government debt is exploding. Does anyone know where the problem comes from and how it might be bypassed? Any help is highly appreciated:)

ActiveFPPerfectForesight.mod (6.1 KB)