I have a simple 3-period OLG model. I am doing some tax/spending reforms by altering each time the residually determined fiscal policy instrument in the government budget constraint. I can find the steady-state, but it the rank condition message appears in some cases, depending on the adjusting instrument. I attach two mod files
In OLG_log.mod :
There are 12 eigenvalue(s) larger than 1 in modulus
for 12 forward-looking variable(s)
The rank condition ISN’T verified!
But everything its OK in OLG_log_sGs_adjusts.mod. I think it’s a timing problem but I cannot find it. Please, any ideas. I m going crazy here!!!
I don’t think this is a timing issue. It’s not the Blanchard-Kahn conditions that are violated, but the rank condition. There may be a good economic reason why for some instruments, there is no unique determinate solution. Have you tried thinking about the economic intuition behind the different results for different instruments? Is there a pattern for which instruments it works?
I have many instruments (4 spending instruments, 4 tax instruments) so it is difficult to find a pattern for which instruments it works. It works fine for 5-6 instruments. It gives error for some others. For the main instruments that I am particularly interested in, it works. I was just checking the rest of them for robustness. So I conclude that I have to think more intuitively as you propose. I ran model diagnostics and there is no error so I guess timing is not the problem as you said.
Athens University of Economics and Business