Dear all,

I am trying to replicate the model of Ludvigson(1996) and Fatas&Mihov(2001).

In a nutshell, their model is a plain vanilla RBC with capital. The model features G_t, government spending, which is financed with a production tax and/or deficit. The dynamics of G_t and D_t (Public Debt) follow two exogenous AR(1) processes while the marginal tax rate, \tau_t, clears the debt accumulation equation: D_t = (1+r_t)D_{t-1} + G_t - \tau_t \cdot Y_t, where r_t is the real interest rate.

The steady state solver finds the correct (analytical) steady state reported in the paper. The BK conditions are met. Nevertheless, Dynare can’t find a perfect foresight solution.

I am very surprised, since the model is fairly simple and according to the papers a solution should exist.

Here is my code: FatasMihov2001.mod (3.7 KB)

Any help or suggestion to understand why a solution is not found is much appreciated.

Best,

Edo