Dear Dynare Users,

I have a New Keynesian Open Economy Model with two countries of the same size and distortionary taxation where I try to find the optimal Ramsey_policy after a demand shock.

In the model government issues debt and finances it with an income-tax.

I use lump-sum taxation each period to offset steady-state distortions, so, in the model, the steady-state is optimal and equal to the Social-Planner’s problem Steady state. This lets me define the value of government debt and tax-level. **I chose 0 government debt** (but i could have chosen other value and still satify the optimal SS. equations form the social planner).

To run ramsey_model I define a steady_state conditional on the instruments which are:

- home and foreign nominal interest rates (R; R*)
- home and foreign income-tax level (\tau, \tau^*)

I therefore use two .m functions to calculate numerically some endogenous variables of steady state (some kind of trick not to use matrices in the calculation)

The thing is that ramsey_policy returns the optimal steady state that I analitically found (which has 0 government debt in S.S.) but the IRFs are such that **debt andincome-tax levels deviate permanently from the steady state**

More… **the deviation varies in direction and magnitude depending on the shock**. (in the model I have government spending shocks for both countries and demand shocks for both countries).

But this is strange, because ramsey_policy is in first place accepting the 0 debt steady_state… My question is:

**Is there something worng with the steady_state or the IRFs??**

If there was a problem with the zero debt steady-state that I indicated with the “initval” values passed to ramsey_policy then why would the deviation vary with the type and magnitude of the shock?

I attached the .mod file and the two .m functions called to calculate the conditional steady state. Could someone help me??

I really appreciate all the help! Than you in advance!

PS:home utility function is:

C^(1-\sigma_c)*(Epsi_c)^(\sigma_c)/(1-sigma_c)+G^(1-\sigma_c)/(1-\sigma_c)-N^(1+\sigma_n)/(1+\sigma_n)

find_n1.m (478 Bytes) find_n2.m (479 Bytes) Open_Nk_nl_tau_Ramsey.mod (8.7 KB)