Blanchard & Kahn conditions are not satisfied: indeterminacy (Govt Spending, Debt and Taxes)

Stochastic simulations
1

Can some one please assist me with this issue. I have checked for a bit but I am not sure if I can spot the error.

1/C = beta*( (1/C(+1))*(R(+1) + (1 - delta)) )
1/C = beta * (1/C(+1)) * (r + 1);
theta * N^chi = (1/C) * w * (1-tau);
Y = A * K(-1)^alpha * N^(1-alpha);
R = alpha * A * (K(-1)^(alpha-1)) * N^(1-alpha);
w = (1-alpha) * A * K(-1)^(alpha) * N^(-alpha);
log(A) = rho_a * log(A(-1)) + eps_a;
log(G) = (1 - rho_g) * log(G_mean) + rho_g * log(G(-1)) + eps_g;
log (tau) = (1 - rho_t) * log (tau_mean) + rho_t * log(tau(-1)) + (1-rho_t) * gamma_t * ((D/Y) - D_by_Y);
G + r(-1)*D(-1) = tau*w*N + D - D(-1);
Y = C + I + G;
I = K - (1-delta)*K(-1);

Error i have:
Blanchard & Kahn conditions are not satisfied:
indeterminacy.

Please assist

2

There is an asterisk missing in the first equation, but you have it listed twice…what is happening there?

In any case, the first equation has the gross interested rate advanced while in the second equation it is not advanced. What does your model say it should be?

Seems your government equation is also missing an asterisk.

D seems to be “debt”? Can I ask what function this variable serves? You have taxes; why not just assume a balanced budget. It seems that physical capital “K” is pinning down “R” in the first Euler, but then are you attempting to pin down “r” in the second Euler using the shock to government expenditure?

You need to give us a little more to go with here…

3

Without the full mod-file, it is impossible to tell what is going on.

4

I am attaching the mod file here. I have changed a few details. However the it
PS_upload.mod (2.0 KB)
doesn’t work still for me

5

Hi,

If you look at the steady-state results you see that D is negative which means that there must be a mistake somewhere .

Moreover you set G=2 as initval value which makes no sense since you also set Y=1.5 as initval.

I think that you should work on your steady-state calculations.

Best

6

Hello everyone, changing the values for initval, actually made it work. Changing the initial values made it work. Thank you everyone for your response.

Maybe, one additional question here, how to go about making dynare code run if one is not very sure about the initial values, is there a way to go about it. Any help here is much appreciated.

Thanks again

7

I would advise you to compute the steady-state analytically. By doing so you can adjust your steady state values without messing with your initval.