Bonds issue

Dynare contributions and examples
1

Dear All,
I would like to understand how to allow in dynare holdings of bonds.
I am trying to modify standard RBC model, simpling including holding of bonds and the repayment back for the next period. But the code doens’t work. Any hints ???

2

Bonds cannot just be put into an RBC.

Intuitively:
The interest on them increases as output decreases. For most functional form the interest (and the yield on capital) even goes to infinity as production goes to zero. So you can produce some positive quantity in the first period and live off it forever thereafter. Or you can even consume more and more. To put it short: consumption is not bounded in this case.

The usual method (Schmitt-Grohe) is to put a negative feedback on the interest rate as a function of net foreign assets:

ir - ir_ss = exp(-nu * b)

This should do the trick.

3

You need to be more precise. What type of bonds are you talking about? What is your problem?

  1. If you are talking about government bonds, you need to either break Ricardian equivalence.
  2. If you are talking about private bonds, you need to have two agents/an open economy for them not be in zero net supply.