I’m trying to include in Iacoviello (2005) model an amortisation rate on debt, i.e. instead of assuming that in each period the whole debt is fully paid, only a fraction is paid (suppose this is given by gamma)
When I set gamma=1 everything works fine. But when I set gamma=0.02 (as seen in other papers) I got a complex steady state. It seems that I get a negative debt stock for constrained households, which affects in turn the steady state housing stock.
Did this happen to anyone? If yes, how did you solve it?
Thank you in advance.
I can only recommend to sit down with pencil and paper and see where the problem derives from. After all, it must be an issue in steady state, which can typically be computed analytically.
Thank you. I have done that already.
Could not be the case that I need to use occbin? I was reading Iacoviello paper (Collateral constraints and macroeconomic asymmetries) and when introducing a slackness condition on borrowing constraint (eq. 14) they use occbin. I was wondering it that could be the case when assuming long term debt.
Without knowing the model in detail, it’s impossible to tell. Are you saying your agents violate a borrowing constraint?
Well, in fact no. For the baseline I am not imposing that.
But to be honest I can not find the mistake. It seems a little bit odd to have a model working with gamma=1, but then when I decrease it no longer works. Maybe I am missing something.