Perfect Foresight Solution Never Found in RBC with government spending, public debt and distortionary tax

Perfect foresight simulations
1

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

2

The steady state values provided in the *.mod file don’t solve the static version of the model. This is most likely unrelated to the reported problem with the perfect foresight, but I don’t know whether the problem with the steady state values comes from an error in these values or in the equations of the model. I will look into the problem with the simulation once the first problem is solved