this is related to a previous problem raised here
in order to find out what’s causing bond path to explode (something buried in my model or possibly algorithm of dynare), i worked with 2 very simple models to test the transition path of bond. both are small open economies, with only bonds-consumption decisions, fixed and known interest rate and endowment, no labor no capital. in both cases, the budget is c(t)+b(t)=y+Rb(t-1), y and R both exogenous and fixed.to close the system mathematically, i had Uzawa discounting and bonds in utility. With Uzawa, the periodical discounting factor is a decreasing function of the population average consumption at that period, so replace beta with mu(xi+c)^(-psi). With bonds in utility, i make the utility function increasing in both consumption and bond holding, U=ln©+alpha*ln(b).
the exercise i do is to start from an initial level of bonds, and use simul command to get the deterministic optimal path that leads to steady state. with bonds in utility, i got bonds converging to steady state values as long as i start not far away from it, which is good. with the Uzawa preference, i get consumption jumping to its steady state value right away, and bonds exploding, both independent of the initial value of bonds. this is strange, because consumption always at steady state is not the optimal solution. if we start from bond above its steady state, we can eat the excess bond in the first period, and then go to steady state consumption from period 2, which is strictly better. besides having the bond exploding issue, i strongly suspect that dynare is not giving the optimal consumption path.
i also have Uzawa discounting in my original 2 country model, and it also has bonds exploding, I wonder if having the Uzawa feature is what causes bond to explode? is there a way to remedy this? or, could this be a computational glitch in dynare?