# BKK model with a bond

**URL:** <https://forum.dynare.org/t/bkk-model-with-a-bond/5515>\
**Category:** Dynare help (legacy posts)\
**Created:** [17 May 2016 15:15 UTC](https://forum.dynare.org/t/bkk-model-with-a-bond/5515 "2016-05-17T15:15:01Z")\
**Posts on this page:** 3\
**Page:** 1

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**Author:** ![kyri82](https://forum.dynare.org/letter_avatar_proxy/v4/letter/k/ee7513/32.png) [@kyri82](https://forum.dynare.org/u/kyri82)\
**Post date:** [17 May 2016 15:15 UTC](https://forum.dynare.org/t/bkk-model-with-a-bond/5515/1 "2016-05-17T15:15:01Z")

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Hi all,

I am trying to solve a simple, two-country model with incomplete markets - i.e. a single bond. I am not sure what I am doing wrong but Dynare cannot solve the model - BK conditions not satisfied. I believe the model is well specified and the steady-state is solved. What is interesting is that if I set the bond-clearing condition as: `B1(-1) + B2(-1) = 0 ; ` (which I believe is the correct way to set it since bonds is a predetermined variable) the model fails the BK conditions. If I set this to `B1+ B2 = 0 ; ` the model is solved but I am a bit skeptical about the results.

Any help would be very much appreciated.

Thanks a lot!

K.  
[BKK\_Bond2.mod](https://forum.dynare.org/uploads/default/original/2X/c/c92e8cc017a40c6bdc99e132c14223a8b33fb3b8.mod) (6.66 KB)

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**Author:** ![jpfeifer](https://forum.dynare.org/user_avatar/forum.dynare.org/jpfeifer/32/5044_2.png) [@jpfeifer](https://forum.dynare.org/u/jpfeifer)\
**Post date:** [17 May 2016 19:28 UTC](https://forum.dynare.org/t/bkk-model-with-a-bond/5515/2 "2016-05-17T19:28:52Z")

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Shooting from the hip, I would argue that the second one is the correct market clearing condition. On some level they are equivalent, of course. But at time t, a feasible allocation must satisfy

```auto

```

While

```auto

```

needs to hold as well at time t, it is a condition on past choices that does not constrain the choice of B1 and B2, because the values were decided on in the past.

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**Author:** ![kyri82](https://forum.dynare.org/letter_avatar_proxy/v4/letter/k/ee7513/32.png) [@kyri82](https://forum.dynare.org/u/kyri82)\
**Post date:** [18 May 2016 16:44 UTC](https://forum.dynare.org/t/bkk-model-with-a-bond/5515/3 "2016-05-18T16:44:22Z")

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Thanks a lot! To avoid confusion, I have replaced B2 with -B1 and then the equilibrium condition becomes redundant. It is nevertheless good to have these discussions to enhance awareness on Dynare.

If I may ask, how would you interpret the extreme sensitivity of the results to the elasticity of substitution (parameter theta\_1) especially at values 0.35-0.45 (i know this is a very important parameter in IBC models). Note that at these low values the model attains a unit root. Is that the reason behind these big differences in the results, despite small movements in the parameter? Also, why is there a unit root? Assuming the model is well specified, is that a pathological case? Note that at low values of theta, omega (the degree of home-bias) gets pretty close to 1 (0.98-0.99…)

Thanks!

Best,  
K.