BK condition problem

General DSGE Modeling
1

collateral_para.mat (2.6 KB)
longrunpro.mod (5.3 KB)

I am trying to introduce financial frictions in the form of collateral constraint into the long-run productivity risk model (Croce · 2014, JME, Long-run productivity risk: A new hope for production-based asset pricing?). My Dynare code (see the longrunpro.mod attached) can compute the steady state, but it reports the BK condition problem:

*There are 5 eigenvalue(s) larger than 1 in modulus *
for 4 forward-looking variable(s)

The rank condition ISN’T verified!

dynare:k_order_perturbation: Caught Kord exception: NaN or Inf asserted in first order derivatives in FirstOrder::solve

I have checked the timing of equations very carefully, but I still can not find the problem. I attached my Dynare code (longrunpro.mod) and parameter file collateral_para.mat here.

Can anyone help me check what is wrong with my code?

Many thanks

2

Usually, this type of problem is caused by timing issues. In your case, the model exhibits explosiveness.

3

Thank you, Prof. Pfeifer,

I actually found that if I replace the household Eular equation: 1/(exp(rf))=exp(m(+1)), with 1/(exp(rf(+1)))=exp(m(+1)), then the code can work.

I am not sure if this is the way to go. It may change the economic meaning of risk-free rate. However, after I made this change, the IRFs seem to be ok. Do you have any thoughts on this small change?

Thanks again,

4

This looks like an instance where you introduce a second timing error to “fix” a first one. With your altered Euler equation, rf would not be known anymore, i.e. not be risk free.