In chapter 7 of Celso Jose Costa Junior’s book, I get different and wrong results when I drop budget constraints (for Ricardian households) from the equilibrium equations of the model, and rather replaces it with budget constraints for non-Ricardian households. In chapters 5 and 6, the book uses budget constraints for non-Ricardian households though, instead of budget constraints for Ricardian households.
I understand from this forum that you can’t use both constraints due to Walras law. But not sure why they give different results.
Here is the log linearised equation for Ricardian households budget constraints:
Pss*CRss*((P+CR)*(1+tau_css)+tau_css*tau_c) + Pss*IPss*((P+IP) *(1+tau_css)+tau_css*tau_c) + (Bss/RBss)*(B-RB) = Wss*LRss *((W+LR)*(1-tau_lss)-tau_lss*tau_l)+Rss*KPss*((R+KP(-1)) *(1-tau_kss)-tau_kss*tau_k) + Bss*B(-1) + omegaR*TRANSss*(TRANS+P);
And here is the log linearized equation for nonricardian households budget constraints:
Pss*CNRss*((P+CNR)*(1+tau_css)+tau_css*tau_c) = Wss*LNRss*((W+LNR)*(1-tau_lss)-tau_lss*tau_l) + (1-omegaR)*TRANSss*(TRANS+P);
Non ricardian households do not own capital and do not invest in bonds.
Here is the associated mod file (original.mod (7.6 KB)) for the case when ricardian budget constraint is used. And here is the mod file (original1.mod (7.5 KB) ) for the case when non-ricardian budget constraint is used.
Any help is very much appreciated.