Model with Investment Adjustment Costs

General DSGE Modeling Replication Attempts
1

Dear all,
I am doing an exercise about RBC model with investment adjustment costs. Please see the pdf file for the model: rbc_model.pdf (106.8 KB)

I solved the model and use equations in part B) in the following mod file.
rbc_adjustment_costs.mod (1.1 KB)

My problem is, the IRF are not the things I expected. If we have investment costs, then firms tend to gradually increase their investment over time so the IRF of investment should be hump-shaped. But it is not the case in this exercise. Unfortunately, I cannot find any problem in my derivation and code (even in this simple exercise).

I would really appreciate if anyone could help me. Many thanks!

2

You don’t have investment adjustment costs, you have capital adjustment costs. See https://www3.nd.edu/~esims1/rbc_extensions_sp15.pdf for a reference.

3

Dear Prof. Pfeifer,
Thanks for your prompt reply! Yes, I only have capital adjustment cost here. Sorry for the mistake.

I have checked the note and did the derivation all over again. Still, I cannot spot any mistake in the FOCs and code. I am not sure if the IRFs are correct or not now. IRF of y and c seem werid to me. Could you please help me check if there is any problem here?

Thanks again!

4

Again, why do you think the IRFs are weird.