Heterogeneous agents and fiscal policy

Dear everyone,

I am currently working on a two-agent New-Keynesian model, based on Bilbiie and Straub (2004), introducing different distortionary taxes. The model includes a Ricardian household (saver) and a non-Ricardian household (rule-of-thumb consumer). As they face different budget constraints, their consumption and labor dynamics should be different. The problem is that when I run the model in dynare, the consumption of both agents is the same. Does anyone know what could be wrong with the model or the code?

Thanks in advance.

chet.mod (3.0 KB)

From what I can see, the labor supply of agents does not move (maybe because of a knife-edge case in parameters), so they are only affected by the change in the common real wage.

Thank you very much, Dr. Pfeifer. I will check on that. I also noticed that including the dividends dynamics in the Ricardian household’s budget constraint plays an important role.

Dear ArtSos

Since I’m working with a quite similar model right now: Could your provide me with the steps you have undertaken in order to get the Euler equation, BC and labor supply of both types of households? I’ve read the paper, but the equations which you put into your file are a bit different. It would be very helpful. Thanks in advance.