No stable equilibrium: BK conditions are not satisfied

Steady state
1

Hello everyone,

First of all, I am not sure if I need to include this topic in “Stochastic simulations” category, as the problem occurs only when I am using stoch_simul command, but I think it is more natural to list the topic in “Steady state” category.

Secondly, for the MATLAB steadystate files to be executed properly, the elder version of Dynare is required. I “inherited” the syntax of these steady state files from a former colleague of mine, and these files do not run properly under the newer Dynare releases. I am using Dynare release 4.5.6 for this reason. If someone could advice me on how to change the steadystate files so that they can run under the newer Dynare releases, I would appreciate it a lot. However, this is not my main concern at the moment.

Here is my problem. Single-agent setup of my model works well, and I manage to find the steady state using Dynare. I am attaching the mod file and MATLAB steady state for your reference here.
V1.mod (11.9 KB)
V1_steadystate.m (7.0 KB)

However, I am experiencing difficultines in the setup with 2 agents. Setup 2a has identical agents and setup 2b implies heterogenous agents.
V2a.mod (13.2 KB)
V2a_steadystate.m (9.2 KB)

I will upload mod and MATLAB steady state file for 2b in the separate message as I have limit of max 5 files to be uploaded (as a new user in the forum).

For both 2a and 2b I manage to find the steady-state values of the model variables using the corresponding MATLAB steady-state files. However, once I attempt to run stoch_simul command in Dynare mod file, I got the error message that BK conditions are not satisfied.

My intuition tells me that there are some mistakes that I made in the model equations after I added the second agent to the economy. Unfortunately, I could not spot them. Any help would be appreciated!

2

Here are the files for setup 2b of the model
V2b.mod (12.7 KB)
V2b_steadystate.m (8.4 KB)

3

For the steady state, see Code not working after updating Dynare to 4.6.0
The following one works:
V2a_steadystate.m (8.9 KB)
Your BK problem is a timing issue. It needs to be

// 35. Economy-wide stock of human capital
h_w + h_e = 1;

V2a.mod (13.2 KB)

1 Like
4

Dr. Pfeifer, I appreciate your timely response and addressing the issue with 2a, I appreciate it a lot! I have updated my Dynare to the newest version (4.6.4), fixed the equation #35 in the mod file, and the issue have been resolved - thank you very much!

Would you be so kind to take a look for my updated files for 2b setup (this is the setup I actually plan to use for my research)? I have updated the steadystate file for 2b, and I fixed the last equation (#29) in the mod file as well. Unfortunately, BK problem is still present, even after these changes. Is this an issue of the parameter values here? Or am I missing anything else in the equations?
Vnew2b.mod (12.7 KB)
Vnew2b_steadystate.m (8.1 KB)

5

I guess it’s about

// 9-10. Household's total stock of human capital (w,e)
hF_e + hS_e = h_e(-1);
hF_w + hS_w = h_w(-1);

See Timing of capital in two sector economy

1 Like
6

You are right, after updating those two equations, BK problem disappeared for 2b setup as well.
It is interesting though that for 2a setup this change is not necessary as the original version of equations 9-10 also worked. I will read the thread about the timing of capital you referred to.

Thank you again, I owe you a lot! If I happen to meet you IRL sometime during the conferences/workshops in the post-COVID environment, I’d be happy to treat you with a lunch/dinner at least =)