I’m writing this message to ask you some help with my simple model. I’m running a closed economy model with a government sector. My problem is the following: my model runs but I have some doubt on the IRF I got, especially for a public spending shock. In fact, when I have a positive shock on public spendings, public debt (bonds) decreases while it should be the opposite intuitively, I spent a lot of time trying to understand why I get this and it should be a detail but I did not find the solution. Moreover, it is very weird because the answer for all other variables looks ok. I attach to this message my .mod and steady-states file, if someone can have a quick look and tell me his/her point of view, I will be really grateful.
Thanks in advance.
Simplemodel10.mod (3.8 KB)
Simplemodel10_steadystate.m (2.0 KB)
Why is debt not a predetermined variable in your model?
I used the same procedure of modelisation that I have found in a paper. I tried to put debt as a predetermined variable but it does not change anything, I still get the same result and moreover the response for r_b (interest on debt) is very weird when I put debt as a predetermined variable.
What you describe suggests a fundamental timing problem in your model. You should deal with that first.
I don’t really understand your point because I tried to change the timing many times but it has no impact on the results I get…
Here are the IRFs that I get from a shock on G , there is my problem, very counter-intuitive. Debt goes down but also tau_k and tau_l (tax rates).
Simplemodel10_IRF_e_g2.eps (31.7 KB)
Again, what happens to tax revenue, i.e. the product of the tax base and the tax rate. Simply define them as a new variable.
When I define a variable T (tax revenues) , it increases a little bit more than the increase in public spendings. Here is the IRF. Could you please tell me if it makes sense ?
Simplemodel10_IRF_e_g2.eps (30.0 KB)
That is up to you to decide. Your model features self-financing government spending shocks. Usually, that is hard to accept.
The point is that my model is very simple and I don’t understand why it features this…
Also, when I define a new variable T for tax revenues, it is higher than public spendings at steady state, can it be one of the explanation ?
In the end, it has to be about your fiscal rules as they govern what happens.
Ok I will check again more in details, thank you very much Mr Pfeifer.