Dear Dynare Team,

I am trying to solve a capital requirements model based on a recent paper by Mendicino et al. (2020, JME) which is based on a BGG (1999) style framework.

In the mod file that I have attached, I am solving this model with aggregate uncertainty, but abstracting from nominal rigidities, monetary policy and household household capital holdings. I additionally attach a file with the variable and parameter definitions and the equilibrium conditions of my model.

I have checked the equations many many times and also cross-checked the timing of variables against a similar older paper of the authors for which they provide code and timing seems to be correct to me.

Nonetheless, I keep running into a **BK condition error**, having no stable equilibrium. I can get around this by arbitrarily specifying one of the auxiliary variables as (+1) instead of present, but my understanding is that this is indeed inappropriate.

Is there anything you can see in the mod file that seems suspicious?

Many thanks,

Fabian

one_sector_final.mod (7.0 KB) One_sector_FOC_Definitions.pdf (162.1 KB)