Hello I have about consumption preference

Dynare help (legacy posts)
1

Hello!
I have a question!
I know maybe it not a good question…, because it’s not a question for code.
My question is in my model my consumption is

C_t= (1-alpha_t)^(1/eta)C_ht^((eta-1)/eta) + (alpha_t)^(1/eta)C_ft^((eta-1)/eta)]^(eta/(eta-1))

I want set alpha_t be a AR(1) shock, but someone ask me
if you set it be a shock if alpha >1 your model will get wrong~~
It’s will happen in dynare? If yes, how can I set a regine for the shock~~

Thanks for everyone

2

I don’t completely get the question, but Dynare computes a smooth Taylor approximation to your FOCs. A constraint of the type you are imagining would require an occasionally binding constraint. This cannot be done in Dynare. Maybe it could be done using the extended path method.

3

Really really thanks for your help!!

I want ask two more question!

  1. I know order=1 is using in log linear form

but…I’m so stupid use in nonlinear form

It will get a big error??

  1. Because of using nonliear form

I remember dynare will take log by itself

then I set AR(1) process to A=A(-1)^rho*exp(ea)

finally my model is success to get result but I afraid all the result are wrong…

thanks for your help!

4

Does someone can give me the answer or some suggest?

Thanks for everyone!

5
  1. Nobody knows. The approximation error depends on the strength of the non-linearity and the shock size. You may be lucky or not.
  2. Dynare won’t automatically take the log. You have to do this manually be using a variable substitution with exp(). Dynare does the linearization for you.