NK Model with Trend Inflation and Government sector: rank condition isn't verified

Stochastic simulations
1

Hello everyone!
I am trying to modify the model in “The Macroeconomics of Trend Inflation” by Ascari & Sbordone (2014) as replicated in the .mod file by Johannes Pfeifer.
My aim is to analyse the impact of fiscal shocks on the economy. As of now, the model includes government spending, lump-sum transfers and distortionary labour income taxes. However, when I try to add the equation specifying the evolution of government debt, Dynare throws an error that BK conditions are not satisfied. I guess the error is in the timing, but I fail to notice where exactly it lies.

mod1.mod (7.6 KB)

Any help would be greatly appreciated!

Best, Ilya

2

Your model shows explosiveness. That may be due to the fiscal rules not stabilizing debt. Have you tried whether the model works with different fiscal rules.

3

Thanks for a suggestion, I’ll try to modify the fiscal sector. One quick follow-up question: how did you figure out that it is the explosiveness that causes the problem? I don’t seem to find anything about it in the model logs.

4

It’s about the number of unstable eigenvalues. It’s bigger than the number of forward-looking variables.

5

Hello, when I run it, I see that some parameters do not have values, is it on purpose? Otherwise you can check twice if all the parameters have values.
Best