Investment adjustment costs

Dynare help (legacy posts)
1

Hi all,

I have a model in which there are investment adjustment costs. For low values of the parameter that governern the costs the model solves without any issues. However, if I increase it above 0.06 I get the following error:

??? Error using ==> print_info at 39 Blanchard Kahn conditions are not satisfied: no stable equilibrium

Shouldn’t that parameter not have any effect in terms of steady-state? (It disappears from the FOC in steady-state.) Any help/advice will be appreciated.

2

I have look at my eigenvalues with and without adjustment cost and I think the problem lies there.

This is what I get without adjustment cost (\Kappa = 0)

[code]EIGENVALUES:
Modulus Real Imaginary

           0                0                0
    2.06e-18        -2.06e-18                0
   7.271e-17        7.271e-17                0
     0.08573          0.08573                0
      0.5824           0.5824                0
      0.9472           0.9472                0
        0.95             0.95                0
        0.95             0.95                0
        0.95             0.95                0
       0.979            0.979                0
       1.067            1.067                0
       1.075            1.074          0.04998
       1.075            1.074         -0.04998
       1.288            1.288                0
         Inf              Inf                0
         Inf              Inf                0
         Inf              Inf                0
         Inf              Inf                0
         Inf              Inf                0
         Inf              Inf                0
         Inf              Inf                0
         Inf              Inf                0

There are 12 eigenvalue(s) larger than 1 in modulus
for 12 forward-looking variable(s)[/code]

And this is with adjustment costs that are high enough (\Kappa >0.05):

1.056e-16 1.056e-16 0 2.268e-16 -2.268e-16 0 0.3702 0.3702 0 0.5954 0.5954 0 0.9471 0.9471 0 0.95 0.95 0 0.95 0.95 0 0.95 0.95 0 0.979 0.979 0 1.067 1.067 0 1.073 -1.073 0 1.075 1.074 0.04996 1.075 1.074 -0.04996 1.288 1.288 0 Inf Inf 0 Inf Inf 0 Inf Inf 0 Inf Inf 0 Inf Inf 0 Inf Inf 0 Inf Inf 0 Inf Inf 0

However, I don’t know exactly what to infer from this output. Thanks for your time.

3

To answer your first post, the Blanchard and Kahn conditions are not a property of the steady state itself, they are a property of the whole model around the steady state, so they are influenced by parameter values.

Try to understand why the properties of the model are so strongly affected by the value of this adjustment cost parameter.