Hi,

Im working on the following simple optimal growth model:

http://imageshack.us/a/img571/6075/cdpv.jpg

with the first-order conditions:

http://imageshack.us/a/img209/261/w1qc.jpg

The Dynare code is:

[code]%

%%%PREAMBLE%%%

%

var y invest k c z;

predetermined_variables k;

varexo eps;

parameters cbeta calpha crho ceta;

cbeta = .99;

calpha = .33;

crho = 0.9;

csigma = 0.035;

%

%%%MODELBLOCK%%%

%

model;

1/c = cbeta * 1/c(+1) * calpha * exp(z(+1)) * k(+1)^(calpha-1);

k(+1) = exp(z) * k^calpha - c;

z = crho*z(-1) + eps;

y = exp(z) * k^calpha;

invest = y - c;

end;

%

%%%INITIAL VALUE BLOCK%%%

%

initval;

k = 0.2;

c = 0.4;

z = 0;

end;

steady;

%

%%%SHOCKS%%%

%

shocks;

var eps = csigma^2;

end;

stoch_simul(periods = 2000,order=2, irf=40);

state_range=0:0.1:10;

state_name=‘k’;

plot_var_name=‘c’;

plot_policy_fun(state_name,state_range,plot_var_name);[/code]

For plotting the policy function I used the m-file by jpfeifer » Sat Mar 16, 2013 (attached)

My goal is to show the differences that occur between the policy functions using first and second order approximation due to certainty equivalence.

Yet I got really strange results. For the 2nd order approximation my policy function looks like

http://imageshack.us/a/img580/8256/xswe.jpg

and for my 1st order approx the policy function looks like

http://imageshack.us/a/img826/7357/bnim.jpg

Im very thankful for any help!

Best regards,

nbt

plot_policy_fun.m (3.39 KB)