May I ask a question on using dynare to solve models with time-varying volatility? Such models is shown to be solved by log-linearization approximation (Bansal, Kiku and Yaron(2007)) or perturbation method, for instance, Malkhozov and Shamloo (2010).
However, I meet with some problems by soving it in dynare. Please have a look at the attached folder. I use a simple example – a consumption based asset pricing model with Epstein-Zin preference and time-varying volatility of consumption, following an AR(1) process. As in Bansal, Yaron and Kiku (2009), consumption variance is a state variable. However, after dynare solving the model, I get the results which does not make much sense.
First, the price-to-dividend ratio is constant, and does not related to the state variable “consumption vol”.
Second, I get strange impulse response functions with respect to vol shock, which are hard to interpret.
The attached folder contains three files:
“LRR_example.mod” is the model file.
“Model.pdf” describes the simple model with time varying volatility.
“LRR_example_IRF_e2.pdf” contains the IRF w.r.t the voaltility shock e2.
TimeVaryingVol.zip (52.6 KB)