Steady: convergence problem in Ramsey 2 Sector w/ Adj. Cost

Hi,

I am simulating a Ramsey Two Sector with adjustment costs and I am having the following message:

SOLVE: maxit has been reached
??? Error using ==> steady_
STEADY: convergence problems

Error in ==> steady at 7
steady_;

Error in ==> RAC at 128
steady(0);

Error in ==> dynare at 26
evalin(‘base’,fname) ;

I have simulated the model without adjsutment costs and it was all fine, but then when I have added the adjsutment costs I have started receiving the above message. I think my equations are correct. I simply cannot understand where the problem is. Any help would be highly appreciated.

Please find attached the *.Mod file named RAC

Thanks a lot!

Fabrizio
RAC.mod (1.85 KB)

Dear Fabrizio,

I would have expected that setting ach=0 would give the model without adjustment cost, but it isn’t the case: equation 10 and 11 have a term going to infinity.
It is usually easier to work with adjustment cost specification that are zero at the steady state.
Also be consistent with the case of variable names (you use c and C)

Kind regards

Michel

Dear Michel,

Thank you so much for your help, I do appreciate it. You are right, this adjustment cost specification is good on paper, but not so good when programming it. For the moment I will live with it by setting the parameter pretty close to zero if I want to shut down adjustment costs, until I find a better specification.

On another note, I made the model work. Let me know in case you are interested into it.

Am I correct in assuming that for some parameter values there might be BK Indeterminacy? I remeber encountering the same problem when I was programming in Matlab before using Dynare.

Kind regards,

Fabrizio

You’re perfectly right, existence of a unique stable trajectory (BK conditions) is a function of specific parameter values.

Best

Michel