Hi there!
I’m trying to replicate Bianchi (2011)'s “Overborrowing and Systemic Externalities
in the Business Cycle”. Concretely, I want to solve for the decentralized and the social planner’s equilibria, assuming that the borrowing constraint is always binding.
The social planner’s problem is solved successfully (i.e., the steady state is found, Blanchard-Kahn condition is satisfied), whereas the decentralized problem does not satisfy the B-K criterion, even though the only difference between both is that in the former, the FONC with respect to tradable consumption is
lambda = a*c^(-sigma)*(ct/c)^(-1/xi) + mu*(kappa*p*(cn/ct)*(1/xi));
In the latter, this becomes
lambda = a*c^(-sigma)*(ct/c)^(-1/xi);
Any ideas on how to approach this challenge? I have attached the .mod files.
bianchi_ce.mod (1.6 KB)
bianchi_sp.mod (1.6 KB)