IRFS Error in NK SOE Model

#1

Hi all, I am trying to create an NK open economy model with a financial sector. For this I am building the model in steps. Now I have households, entrepreneurs, a production sector and a central bank. The idea is that households lend money to entrepreneurs who then use this resources to buy capital. These entrepreneurs later rent it to firms to produce. For some reason, when I run the model and I do a monetary policy shock the iris of entrepreneurs show that their level of consumption changes permanently. This is wrong as a temporary shock should not have permanent effects. I am attaching the model.
Thanks
Mario

solvess5b.m (807 Bytes)
twocountrymodel005b.mod (6.2 KB)

#2

I think I know the consequence of the problem. As model_diagnostics show I seem to have a unit root. If I am correct, this takes is related to the loans variable (l1) as its policy function show:

l1
Constant 2.591694
ph1(-1) -0.508547
pm1(-1) 0.581649
RER1(-1) -1.24216
z1(-1) 0.493813
u(-1) 0.167052
Pstar(-1) 0
k1(-1) -0.019226
rl1(-1) 2.562833
l1(-1) 0.998853
i1(-1) 0.000012
ez 1.097361
eu 0.371227
ep 0

As I said I am building the model step by step so I am attaching the file in the previous step which does not have this problem.
The only difference this two versions are related to giving loans to entrepreneurs
(1).- Euler equation of households who lend to entrepreneurs
c1^(-sigma) = beta1*(1+rl1)/(1+pic1(+1))c1(+1)^(-sigma);
(2).- Euler equation of entrepreneurs who borrow
ce1^(-sigma) = beta1
(1+rl1)/(1+pic1(+1))*ce1(+1)^(-sigma);
(3).-Different version of entrepreneur Budget Constraint
(rk1+(1-delta1)*q1)k1(-1)+l1= ce1 + q1k1 + (1+rl1(-1))/(1+pic1)*l1(-1)

solvess4b.m (761 Bytes)
twocountrymodel004b.mod (6.0 KB)

#3

The unit root seems like the type of problem that occurs in open economy setup models. Essentially, after a shock that affects debt, the permanent income hypothesis kicks in and the household just consumes the annuity out of its assets forever, never decumulating debt. This is because both types of agents have the same discount rate. Usually, borrowers are modeled as more impatient

#4

Yes, that seems to be the problem I changed the model as you already mentioned by chnaging the discount rate of borrowers and adding a LTV restriction to them