# Parameter Updating Transition Permanent Shock **URL:** \ **Category:** Perfect foresight simulations\ **Created:** [17 November 2025 15:55 UTC](https://forum.dynare.org/t/parameter-updating-transition-permanent-shock/28096 "2025-11-17T15:55:33Z")\ **Posts on this page:** 6\ **Page:** 1
**Author:** ![JanAegten](https://forum.dynare.org/letter_avatar_proxy/v4/letter/j/ba8739/32.png) [@JanAegten](https://forum.dynare.org/u/JanAegten)\ **Post date:** [17 November 2025 15:55 UTC](https://forum.dynare.org/t/parameter-updating-transition-permanent-shock/28096/1 "2025-11-17T15:55:33Z")
Hi Dynare Community, I am running a PF simulation where I have a permanent shock that affects e.g. productivity. The model is a closed economy New Keynesian model that features households (HH), production firms, financial intermediaries and a government that consists of a fiscal authority and a central bank. My problem comes from the HH side, in particular **how can we allow for parameters to update along a deterministic transition?** On the context, HH maximise the sum of expected discounted utility with habit formation in consumption, they save through deposits, corporate securities and gov bonds. Importantly, I assume the access to securities and bonds to be subject to quadratic adjustment costs. Let us focus on the government bonds: The FOC reads as: E\_t\left(\beta\Lambda\_{t+1,t}\left\{\left(1+r\_{t+1}\right)\frac{q\_t}{q\_t+\kappa\left(Bh\_t-\bar{Bh}\right)}\right\}\right)=1 where for simplicity, q\_t is the price of bonds, r\_t\>0 its return, Bh\_t households’ holdings, \bar{Bh} their reference holdings, \Lambda\_t is the HH stochastic discount factor, and \kappa \> 0 the adjustment costs. As I am doing a transition following a permanent shock, the value of the \bar{Bh} must change, because the value of Bh\_{t} will vary as e.g. productivity changes. I have a steady\_state\_model block in which I call a function to numerically solve for certain variables (meaning that I cannot have an analytical expression of some equations), and I set \bar{Bh}= Bh\_{ss} - \frac{(\beta(1+r\_{ss})-1)q\_{ss}}{\kappa}. The initval/endval block only set the exogenous variables. The model finds an initial and end steady state, both of which satisfy rank condition, and are stable. Model diagnostics look also okay. In terms of dynamics, after calling the PF solver, I receive the message " Entering the homotopy method iterations… Iter. | Share | Status | Max. residual | Duration (sec) +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ 1 | 1.00000 | failed (in endval steady) | 0.0 " across all ten iterations, all of which instantaneously, suggesting a deeper issue. Running the model without shocks, things work properly. Would anyone have an idea why the model keeps on failing and how to properly fix \bar{Bh}? Many thanks in advance for your help! Jan ---
**Author:** ![jpfeifer](https://forum.dynare.org/user_avatar/forum.dynare.org/jpfeifer/32/5044_2.png) [@jpfeifer](https://forum.dynare.org/u/jpfeifer)\ **Post date:** [18 November 2025 15:17 UTC](https://forum.dynare.org/t/parameter-updating-transition-permanent-shock/28096/2 "2025-11-18T15:17:54Z")
Is Bh even well-defined in that context? What is its value supposed to be along the transition? ---
**Author:** ![JanAegten](https://forum.dynare.org/letter_avatar_proxy/v4/letter/j/ba8739/32.png) [@JanAegten](https://forum.dynare.org/u/JanAegten)\ **Post date:** [20 November 2025 14:28 UTC](https://forum.dynare.org/t/parameter-updating-transition-permanent-shock/28096/3 "2025-11-20T14:28:42Z")
Hello Johannes, Thank you for your answer. \bar{Bh} is a reference level of holdings and its value should be positive and possibly time varying. Along the deterministic transition, it is determined by the Euler equation, the budget constraint, and market clearing. I am thinking there must be a way to capture that limited asset participation for HH while there is a permanent shock hitting the economy, and making it change its initial steady state. In that spirit, Bh\_t is well defined, and so must be its reference level \bar{Bh}. I am noticing that the linear\_approximation solver is the only one that manages to solve the model. ---
**Author:** ![jpfeifer](https://forum.dynare.org/user_avatar/forum.dynare.org/jpfeifer/32/5044_2.png) [@jpfeifer](https://forum.dynare.org/u/jpfeifer)\ **Post date:** [20 November 2025 14:54 UTC](https://forum.dynare.org/t/parameter-updating-transition-permanent-shock/28096/4 "2025-11-20T14:54:23Z")
From what you describe, \bar{Bh} should be an exogenous variable that you predefine. ---
**Author:** ![JanAegten](https://forum.dynare.org/letter_avatar_proxy/v4/letter/j/ba8739/32.png) [@JanAegten](https://forum.dynare.org/u/JanAegten)\ **Post date:** [21 November 2025 13:42 UTC](https://forum.dynare.org/t/parameter-updating-transition-permanent-shock/28096/5 "2025-11-21T13:42:37Z")
Interesting, thank you! I understand then that this “exogenous” \bar{Bh} is then dependent on endogenous variables, given that it is pinned down by the Euler equation, the budget constraint, and market clearing. I will give it a thought and experiment. Best, Jan ---
**Author:** ![jpfeifer](https://forum.dynare.org/user_avatar/forum.dynare.org/jpfeifer/32/5044_2.png) [@jpfeifer](https://forum.dynare.org/u/jpfeifer)\ **Post date:** [27 November 2025 16:36 UTC](https://forum.dynare.org/t/parameter-updating-transition-permanent-shock/28096/6 "2025-11-27T16:36:37Z")
No, you cannot endogenize it. Bh is a target from outside of the model.