I am currently working on a very simple ramsey-cass-koopmans model with a skilled and an unskilled worker. It works perfectly well under the assumption that the unskilled worker is nonricardian i.e. does not have access to the capital market and therefore consumes his or her entire income.
However, as soon as I let go of this assumption and replace w_u*l_u=c_u with the corresponding euler equation, I start running into problems. Dynare manages to find a steady state, but this steady state is incorrect: labour hours l_u and l_s, which should be between 0 and 1, are both very large, and so are consumption levels c_u and c_s. The labour-leisure-tradeoff is described by w_u/c_u=utility of leisure *(1-l_u) and analogously for the skilled worker. In the resulting steady state, the left hand side is positive and the right hand side negative, but both values are too close to zero for dynare to distinguish them.
The generalized Schur decomposition fails, but model diagnostics finds no obvious problems.
What might be the issue here? And how could I go about solving it?
Thanks in advance!
ricardianrck.mod (1.7 KB)