Hi,
I have a basic model with 8 unknowns and 8 equations. When I try to run it, the residual of the last static equation is -inf. And the equation is correct, hence I do not understand the problem. I would appreciate it if anyone could help with some suggestions.
Residuals of the static equations:
Equation number 1 : -0.9816 : G function for L firm
Equation number 2 : 0.15902 : Euler for L firm
Equation number 3 : 0.21444 : Sigma for L firm
Equation number 4 : 0.12644 : Profits for L firm
Equation number 5 : -0.64 : G function for H firm
Equation number 6 : 0.16462 : Euler for H firm
Equation number 7 : 0.75441 : Sigma for H firm
Equation number 8 : 0.1355 : Profits for H firm
Equation number 9 : 0 : Total output
Equation number 10 : -Inf : Inverse demand function
I am running this in Dynare using the code below:
clear; close all; clc
addpath /Applications/Dynare/4.5.6/
addpath /Applications/Dynare/4.5.6/matlab/
cd /Users/lauraft/Dropbox/Dynare
dynare Model
%------------------------------------------------------------
% Declare endogenous and exogenous variables
%------------------------------------------------------------
var kH kL P Y SigH SigL profitL profitH AL AH;
varexo mH;
%------------------------------------------------------------
% Declare model parameters
%------------------------------------------------------------
parameters Abar alpha beta gamma Pbar r rho maxT zL zH sigmaA2 sigmaE2 sigmaTheta2 sigmamH2;
%------------------------------------------------------------
% Calibrated parameters
%------------------------------------------------------------
Abar=3;
alpha=0.5;
beta=0.98;
gamma=1;
Pbar=1;
r=0.2;
rho=0.6;
maxT=8;
zL=1;
zH=2;
sigmamH2=0.01;
%------------------------------------------------------------
% Shocks parameters (mean & variances)
%------------------------------------------------------------
muE=0;
sigmaE2=2;%if 3, data savvy firm always above
muA=0;
sigmaA2=1;
muTheta=0.5;
sigmaTheta2=1;
% measure of data savvy firms
%------------------------------------------------------------
% Set DO_IRFS=1 to plot impulse responses
% Set DO_ESTIMATION=1 to do estimation
%------------------------------------------------------------
DO_IRFS = 1 ;
%------------------------------------------------------------
% Model equations
%------------------------------------------------------------
model ;
% Large size, bad data firms: LOW
%--------------------------------------
[name = ‘G function for L firm’]
AL = Abar - SigL- sigmaA2;
[name = ‘Euler for L firm’]
r * kL^(1-alpha)=alpha * P * AL + alpha * beta * zL * SigL(+1)^2 * sigmaE2 * P(+1) * kL(+1)^(alpha);
[name = ‘Sigma for L firm’]
SigL = ((rho^2*(SigL(-1)^(-1) + sigmaA2^(-1))^(-1) + sigmaTheta2)^(-1) + zL * kL(-1)^(alpha) * sigmaE2^(-1))^(-1);
[name = ‘Profits for L firm’]
profitL= Pbar * AL * kL^alpha - r * kL;
% Small size, good data firms: HIGH
%----------------------------------------
[name = ‘G function for H firm’]
AH = Abar - SigH - sigmaA2;
[name = ‘Euler for H firm’]
r * kH^(1-alpha)=alpha * P * AH + alpha * beta * zH * SigH(+1)^2 * sigmaE2 * P(+1) * kH(+1)^(alpha);
[name = ‘Sigma for H firm’]
SigH = ((rho^2*(SigH(-1)^(-1) + sigmaA2^(-1))^(-1) + sigmaTheta2)^(-1) + zH * kH(-1)^(alpha) * sigmaE2^(-1))^(-1);
[name = ‘Profits for H firm’]
profitH = Pbar * AH * kH^alpha -r * kH;
% Industry
%----------
[name = ‘Total output’]
Y= AL * kL^alpha + mH * AH* kH^alpha;
[name = ‘Inverse demand function’]
P = Pbar *Y^(-gamma);
end;
% STOCHASTIC PROCESSES FOR THE SHOCKS
%-------------------------------------
%------------------------------------------------------------
% Initial conditions
%------------------------------------------------------------
initval;
kL=0.6322;
kH=0.6775;
SigH=1.3600;
SigL=1.0184;
end;
%------------------------------------------------------------
% Declare shocks
%------------------------------------------------------------
shocks;
var mH=sigmamH2;
end;
%******************************************************************
%
% %%% %%% % % % %%% %
% % % % % % % % %
% %%% % % % % % %%% %
% % % % % % % %
% %%% %%% %%% % %%% %
%
%******************************************************************
%------------------------------------------------------------
% Call steady state
%------------------------------------------------------------
resid(1);
steady;
%------------------------------------------------------------
% TO SEE PROPERTIES OF MODEL
%------------------------------------------------------------
if DO_IRFS==1;
stoch_simul (order=2,irf=20) kH kL profitH profitL P Y;
end;