Seek help fixing Blanchard and Kahn condition: no stable equilibrium please

Stochastic simulations
1

Hi everyone,

I am running into “Blanchard & Kahn conditions are not satisfied: no stable equilibrium.”. When I ran the check command I had

“There are 4 eigenvalue(s) larger than 1 in modulus for 3 forward-looking variable(s)
The rank condition ISN’T verified!”

From checking older posts I believe I might have the timing convention wrong, but I’m not sure whether this is a true problem or it is because of my parameters. Can anyone please take a look on my model?

I am working on creating a New Keynesian model from my own to understand from the ground up. I would like to start from the basic or standard model. The key elements are; 1) Representative household consumes and invest in domestic bonds 2) Monopolistically competitive intermediate goods producers with Rotemberg adj cost 3) Standard perfectly competitive final goods producers 4) Standard Taylor rule applies.

I have attached the model below.

basicDSGE.mod (3.1 KB)

Best,

Korn

2

You should eliminate debt from the model. In representative agent model, D=0 is the market clearing condition that you are missing.

3

Hi Professor,

Thank you very much. It works!

May I ask how did you detect that D=0 is the missing market clearing? Is it because it is common knowledge that the debt is zero in RANK model, or is there logical or intuition in the model that dictates it?

Best,

Korn

4

A representative agent has nobody he/she can borrow from or lend to. Everyone wants to do the same action. Thus, private debt needs to be in zero net supply.

5

Thank you very much professor for a very clear explanation.