This may be a trivial question but if you help me I would be glad. I am working on Kitano’s Capital controls and welfare paper. (https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2010-01.pdf) I have difficulty in the coding firm side of the model. Firms borrow from abroad through banks, make production in Cobb Douglas production function. Pay rental rate on capital, wage on labor and distribute dividends to hh.
In dynare in the model block how should I write the firm side? I wrote production function, first order conditions with respect to capital and labor, and firm dividend function. (div = y - hw-rk -df(+1) + df (1+r)) Since the first order condition with respect to firm borrowing is identical to household first order condition, I did not write again. But one equation is missing. Above equation one can derive dividends or firm borrowing. But we need to define both… Any help would be appreciated.
In your model you need to determined the amount of firm borrowing. In equilibrium, supply needs to equal demand. What determines this in your model if you only include firms’ demand?
To follow up on Johannes, you need to specify what determines firm borrowing. This can be done by assuming that firm i pays their workers and rents ahead of production. So you can specify
l_i = w h_i + r k_i
as an additional equation. This then implies that the demand for loans is simply the production costs.
The way you have defined dividends above doesn’t seem uniquely different than what the vast majority of the literature does in saying that “firm profits are redistributed to households”; in what you have written above, dividends from the firm side will be used to cancel dividends from the household’s budget constraint when you derive your aggregate market clearing condition, which I am guessing should take the form of
Y = C + Investment
Also note that I think you have defined dividends above incorrectly. The gross loan repayment outflow
df (1 + r)
should more than likely come in negatively as it is a repayment to the bank. So your definition for dividends for firm i should be
div_i = y_i - w h_i - r k_i + df_i(+1) - df_i (1 + r)
You will then need to aggregate over i. Also, pay attention to your timing because if you get things wrong you will end up back here with simulation errors.
Thank you very much for your help. I managed to run the model. I solved the model with planner solution.
What was the solution?
Prof. Pfeifer, I solved the centralized model and imposed debt elastic interest rate. I substitute dividends, output and investment in the household budget constraint. This way I found the total foreign debt position of domestic individuals: sum of firm and household borrowing. But this way of course I couldn’t find how portion of the total debt position belongs to households and what portion of the total debt belongs to firms.