Hello I have about consumption preference

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

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.

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!

Does someone can give me the answer or some suggest?

Thanks for everyone!

  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.