Savings/Investment Market Clearing in a Two-Sector RBC Model

General DSGE Modeling
1

Hi all,

I am building a model with one representative household and two production sectors, each accumulating and owning sector specific capital stocks. The representative consumer solves a top level CRRA consumption/saving/labor supply problem and splits consumption between sectors according to a CES aggregate. On the production side the two sectors are made up of a continuum of monopolistic firms operating under monopolistic competition. They decide on production levels to maximize profits, subject to a capital constraint, and make investment decisions subject to quadratic investment cost.

My question is; given that the firms want to invest in capital and the consumer wants to save over time, how is the market for savings cleared in the two-sector setting?

The model produces sensible steady-state results, but breaks down/ becomes jumpy when perturbed. I suspect there must be a timing issue, or perhaps an issue with the savings allocation between sectors:
Kapital_lmmcp.mod (4.2 KB)

Any tips on papers with a similar setup or feedback on what is wrongly specified in the above model is much appreciated.

Thanks!

2

The “jumpy” behavior seems to come from an insufficient number of simulation periods that does not allow a return back to steady state. Using more periods and dropping the lmmcp solver returns sensible results:
Kapital_lmmcp.mod (4.2 KB)

I would start from there and investigate why the mcp tags do not work.