I follow the model from Iacoviello and Neri (2010) which consists of the patient household, impatient household and firm. I add borrowing and saving to the model. The impatient household and firm have no borrowing constraints. We want the budget constraints to determine the borrowings and Euler equation determine consumption. The first version attached can be run without any error but the problem is that most of the variables are NaN. I searched the forum and found it could be the unit root problem. I also use model diagnostics which gives the following information,

model_diagnostic: the Jacobian of the static model is singular

**there is 2 colinear relationships between the variables and the equations

Relation 1

Colinear variables:

h_p

n_cp

n_hp

c_p

h_i

n_ci

n_hi

c_i

S

B

w_cp

w_ci

w_hp

w_hi

k_c

b_i1

k_h

l

c_e

q_h

b_e1

q_l

Y

GDP

ih

i_c

i_h

Relation 2

Colinear variables:

S

B

c_e

b_e1

Relation 1

Colinear equations

4 9 18 20

Relation 2

Colinear equations

4 9 18 20**

Actually the three Euler equations from the three sectors are involved. I tried to think about the problem may come from no borrowing constraints from both the impatient household and firm. I then add a borrowing constraint to the impatient household but not to firms (see attached the version 2). Then the model diagnostic gives the following,

model_diagnostic: the Jacobian of the static model is singular

**there is 1 colinear relationships between the variables and the equations

Colinear variables:

S

B

c_e

b_e1

Colinear equations

4 18 20

**

The number of variables to be NaN has become less in this case. I am wondering if the absence of borrowing constraints causes the model to be non-stationary or is there other problem that I didn’t realise?

2.mod (8.7 KB)

1.mod (8.56 KB)