I attempt to add a government to the RBC model. The government levies distortionary taxes and issues non-state-contingent bonds. Dynare tells me that There are 3 eigenvalue(s) larger than 1 in modulus for 2 forward-looking variable(s). The rank condition ISN’T verified! I think that the problem lies in the bond interest rate, but I want someone to help me explain the reason. Thank you!
// Endogenous variables:
var C K Y B R W r z g;
// Exogenous variable:
varexo epis_z,epis_g;
// Parameters declaration and calibration
parameters alfa betta delta rho_z rho_g sigmma_z sigmma_g gbar tau_a tau_n;
alfa=0.34;
betta=0.98;
delta=0.025;
rho_z=0.95;
rho_g=0.87;
sigmma_z=0.007;
sigmma_g=0.04;
gbar=0.28;
tau_a=0.2;
tau_n=0.3;
// Equilibrium conditions
model;
log(z)=rho_z * log(z(-1))+epis_z;
log(g/gbar)=rho_g * log(g(-1)/gbar)+epis_g;
tau_nW+tau_arK(-1)+B=B(-1)R(-1)+g;
1/C=betta((1-tau_a)r(+1)+1-delta)/C(+1);
1/C=bettaR/C(+1);
W=(1-alfa)Y;
r=alfaY/K(-1);
Y = zK(-1)^alfa;
C+K+g=Y+(1-delta)*K(-1);
end;
initval;
z = 1;
g = gbar;
R=1/(betta);
r = 1/((1-tau_a)betta)+delta-1;
K=(r/alfa)^(1/(1-alfa));
Y = zK^alfa;
C = Y-g-delta*K;
end;
steady;
// Check the Blanchard-Kahn conditions
check;
// Declare a positive technological shock in period 1
shocks;
var epis_z;
stderr sigmma_z;
var epis_g;
stderr sigmma_g;
end;
stoch_simul;