Blanchard & Kahn condition and zigzag IRF

General DSGE Modeling
1

Hello to everyone,

I am dealing with a search and matching model solved with perfect foresight, which you can find attached. At first glance, the model seems to work just fine, but as I try to lower the unemployment benefit marginally (from 0.54 to 0.53), the Blanchard & Kahn condition is not satisfied (9 EV > 1 for 8 forward-looking variables). I guess I have a timing problem, which I “fix” by setting a parameter in a way that I get one eigenvalue less larger than 1 in modulus. My guess would also be confirmed by the fact that although with ub = 0.54 the rank condition is verified, I get IRFs that have a zigzag behavior.

My guess would be that I have a timing problem in the employment and labor supply dynamics, but I really cannot figure out where the problem lies. I would really appreciate any help.

sm.mod (2.4 KB)

2

I encountered the same problem. Parameter modifications led to this issue with the Blanchard & Kahn condition. You will need to search for an appropriate combination of parameters to calibrate your model.

3

Indeed, the dynamics in the current implementation look strange and suggest that indeed you

Have you tried simplifying the model, e.g. by removing the New Keynesian block?

@Meamina Here it is most likely a timing issue. Changing parameters is unlikely to fundamentally solve the problem.