I am trying to build a model which would allow for two options:
- financing productive/unproductive government spending by a combination of government debt and lump-sum taxation
- monetary financing of productive/unproductive government spending (using seigniorage)
I have succeded in building a working model for the first case.
In particular, what I have is (money demand, debt evolution, taxes and seigniorage definition):
and the usual Taylor rule.
When I stich off the Taylor rule and replace it by an equation which describes the degree of monetary financing:
I get indeterminacy due to the violation of BK conditions. What am I doing wrong? While deriving the model I loosely followed this paper.
Apart from that, I am not sure how to properly write this down in Dynare. I cannot log-linearize s_t because in steady state it is zero (unless trend inflation is positive). That is why I leave it without the exp() in the equations. However, in this case IRFs for government debt tend to become strange: following a 1% of GDP shock to government spending, debt falls by 2 (which means 200%). Should I somehow modify my debt accumulation equation if I use both exp() and linear variables?
Many thanks for any suggestions!
model.mod (7.7 KB)