Oscillating IRFs when there is capital adjustment cost

Stochastic simulations
1

Dear All,

I run into a problem using Dynare and hope you can kindly help me out.

The model has two types of firms constrained by their land value and earnings when borrowing from savers. I think the model is standard. The problem is the IRFs are oscillating when I introduce capital adjustment costs. Without adjustment costs, the IRFs are normal.

I learned from the forum that the typical cause could be a timing issue. But I do not think it is the case here since when I set adjustment costs (iotta in the model) to zero, it works. Maybe I am wrong.

I attached the code and file.

Really appreciate it if anyone could help. Thanks!!!

Best,
Bob

HHLE.mod (3.7 KB) HHLE_steadystate.m (3.0 KB)
Sim.pdf (160.0 KB)

2

Recheck the FOCs related to the adjustment costs. When these parts drop out from the model, it works. This suggests the problem is there.

3

Dear Professor Jpfeifer,

Thanks for your reply!! I tried differernt values of the asjustment cost. The larger the iotta, the more oscillating the IRFs are. A small enough iotta makes the IRFs look normal. It is a wired phenomenon. I really have no clue.

I will definitely check the FOCs again following your suggestions. Will there be any other potential reasons for this phenomenon?

Thanks so much!!

Best,
Bob

4

It might have to do with the optimal economic adjustment in the model, but it is hard to tell. You as the model-builder need to understand the economics.

5

Dear Professor Jpfeifer,

Thanks for your comments! I will try to figure it out.

Thanks!!

Best,
Bob