# Perfect foresight model

Dear professor Pfeifer

``````    I construct a deterministic model to study the impact of financial tightness on current account balance. suppose y_ss is a parameter denoting steady state value of variable y, but variable y is related to financial tightness which is a exogenous variable, so I cannot calculate y_ss in the initval and entval block. How can I solve this problem? Looking forward to receive your reply. Have a nice day.

James``````

What do you mean? The steady state is always conditional on the exogenous variables, in your case conditional on the initial and terminal value for tightness.

I need to determine the value of parameter y_ss which equals to the steady state value of variable y, but parameter y_ss cannot be put in the initval block as it’s not a endogenous or exogenous variable. So how can I fix this problem?

I still don’t understand. You want to determine the parameter y_ss as the steady state of y conditional on the initial of the exogenous variable for use in the mod-file, which implies that the steady state itself is going to depend on y_ss? And the problem is how to deal with this fixed point problem?

I am sorry I reply so late. I can calculate the steady state of variable y conditional on the initial value of exogenous variable, as I set a simple intertest rate rule which responds

to output y and inflation rate pi, so I want to determine the value of parameter y_ss. As y_ss is a parameter, so it cannot be put in the initval block.

In order to solve this problem, I set y_ss as an exogenous variable, so I can determine its value as y_ss=y in the initval or endval block, is this treatment appropriate?

I upload my mod-file in the attachment.
financial_friction.mod (5.38 KB)

No, this treatment is not appropriate, because you will not be correctly setting y_ss. For cases like the one you describe where you need to determine a parameter value you will have to compute it analytically (or numerically using an auxiliary function) before starting perfect foresight simulations.