Epstein-Zin Preferences in basic New Keynesian model

[jpfeifer]

Your problem may be numeric. See

Endogenous Growth Model

Epstein-Zin preferences introduce big nonlinearities into the model that sometimes lead to numerical problems. Your U1sigma is about 21 in steady state. It enters as exp(U1sigma) which is huge and can result in overflow. Your are lucky in that the residual is still within Dynare’s accepted tolerance. Thus, there is not too much to worry. But best practice in these cases is to introduce a normalizing constant into the utility function that makes U equal to 1 in steady state. That avoids most pro…

Your steady states are

STEADY-STATE RESULTS:

V                		 -172.197
Vexpec           		 1.08976e+114

which is a huge size difference. You may want to introduce a normalizing constant as in:

JohannesPfeifer/DSGE_mod/blob/master/Born_Pfeifer_2020/BP2020_CES.mod