Blanchard Kahn conditions are not satisfied When adding a new variable?


#1

Dear Professor Pfeifer,

I have ecountered a problem when running the dynare code.

My code runs well until I add a new variable Tax(TVV in the code) in the model. It displays that ‘’ The rank condition ISN’T verified! ‘’.

Normally this error means the timing issue, but it seems that this new variable Tax does not influence the timing of model. Why does this happen? Could you please give some advice?

The attachment is the code.Any reply will be appreciated. Thank you!


#2

This is not a matter of timing. The error message is

Blanchard Kahn conditions are not satisfied: no stable equilibrium

This indicates that your fiscal rules lead to the government budget constraint not being satisfied.


#3

Dear Professor Pfeifer,

Sorry to bother you again, but I still do not understand why the government budget constraint not being satisfied after I checked the code again.I just add Tax variable in the budget constraint of the household and the goverment. Why does this happen and how should I improve it?

Looking forward to you reply. Many thanks!


#4

What do you mean with

?
You cannot simply add that tax. The revenues of this have to so somewhere, i.e. the government needs to spend it. Otherwise, it will be making continuous surplus which will result in an explosive asset position.


#5

Dear Professor Pfeifer,

Sorry that I did not make that clear.

I mean that I just add a lump-sum Tax(TV) as a new variable in the budget constraint of household, and then the budget constraint of government is just ‘‘gV=TV’’.
Tax(TV) is set as constant proportion of output which written as ‘‘TV=wTVV*YV’’(wTVV is the ratio parameter).

So the TV and gV are the two adding variables, and ‘‘gV=TV’’ ‘‘TV=wTVV*YV’’ are the two adding equations.

I do not understand why this ‘‘no stable equilibrium’’ error happen. Did I do something wrong? Any reply will be appreciated. Thank you!


#6

You need to understand the economic intuition here. If you set
muTVV=0.2;
i.e. smaller than your 0.4 the model will run, but will produce oscillating IRFs. So there is a problem if the government taxes too much.