Forlati and Lambertini (2011) BK Condition

Dear All,

I run into problems replicating Forlati and Lambertini (2011), which basically applies BGG 1999 mechanism in the housing market. I attached the model equations in the PDF file, which I think is pretty clear.

My question is that the FOC with respect to the idiosyncratic shock cutoffs (\bar{omega}_{t+1}) is at time t+1, in equation 1.10 in the PDF. However, when I input the model in the Dynare, it encounters BK condition violation (with one more jump variables than eigenvalues larger than 1). The BK condition is satisfied if I change equation 1.10 from t+1 to t.

Shall I change the timing of the idiosyncratic shock cutoff FOC? Or are there other timing issues rather than this one?

I would really appreciate any help for my question and thanks so much!!


HB.mod (2.3 KB) HB.pdf (115.2 KB) HB_steadystate.m (3.7 KB)

That equation holds contemporaneously, not just in expectations. So you must indeed shift it.

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