Hi everybody,
I am trying to find the optimal carbon tax in a 2 sector dsge model and I get the following error:
Ramsey: The steady state file does not solve the static first order conditions conditional on the instruments.
Also, I get some residuals in factor prices equations. Though, the same non linear system of equations delivers me a credible steady state in a perfect foresight exercise, meaning that equations should be right.
How can I interpret the error message?
thank you
mc_tax_ramsey.mod (7.2 KB)
mc_tax_ramsey_steadystate.m (2.1 KB)
findssmc_tax_ramsey.m (1.5 KB)
You have the planner choose tau, but in the steady state file, you override that value with
tau=(phi_2*phi_3/phi_1)*(abt^(phi_3-1));
That cannot work. You need to compute the steady state conditional on a provided value for tau.
Thank for your reply.
What do you mean by computing the steady state conditional on the value provided for tau? If tau is declared in the endogenous variable block in the .mod file, I should provide a steady state equation for it in the steadystate.m file? If this is not the case, how can I handle equations involving tau in the stady state files like, for instance, brown factor prices, abatement and emission costs?
No, the value for the instrument is not endogenously determined by your model equations. Rather, the planner chooses the steady state value for tau. In order for that to work you need to have the header structure shown in
Thank, now it works. Just another question.
In this kind of literature, second order approximations of the welfare criterion are often used, why a lot of authors do so? Is therefore my non-linear specification of the period utility function uncorrect?
No, that should be correct. Dynare will approximate the utility function at the specified order.