Clerc et al. (2015)

General DSGE Modeling Replication Attempts
1

Hi,

I am trying to replicate Clerc et al. (2015), and the list of equations is reported on page 47 of the working paper (attached). I struggle to understand why the banks participation constraints are not included in the final list of the equations, I have always included them in papers using the CSV set up. Does anyone familiar with this model have a clue about this?

Thanks

Clerc et al. (2015)_wp.pdf (502.7 KB)

2

You cannot really tell without trying to fully replicate the paper. They may simply have forgotten to write them down in the list. Or does the number of equations match the number of variables in the appendix? Having the Lagrange multiplier on the participation constraints there may suggest otherwise.

3

Many thanks for this. Yes, number of equations matches the number of variables, where variables include the two Lagrange multipliers but equations do not include the participation constraints.

The only thing that comes to my mind is that since the participation constraints are not only function of the borrowers’ (mortgagors and entrepreneurs) default thresholds but also of the banks’ (since they can also in turn default on savers’ deposits), the two Lagrange multipliers are pinned down by the two equations expressing banks’ default thresholds (73 and 74). But I surely could be wrong.

4

That sounds like a reasonable guess.