I’m trying to run my first model with Dynare so I appreicate your help and patience.
The set-up is very simple. A stochastic endowment economy with an exogenous fixed interest rate. The only bit of extra is that there is taxation that depends non-linearly on income. Taxation is positive with the (given) steady state value of endowment but could in general become negative (income subsidy) if the endowment realisation is very low.
I would like to simulate the model to generate paths for consumption, assets and the endowment realisation. However, matlab complains: “Impossible to find the steady state. Either the model doesn’t have a steady state, there are an infinity of steady states, or the guess values are too far from the solution” . This is even though I have computed one particular exact steady state as the initial value. Why doesn’t matlab converge to that? I suppose there are an infinity of steady states if consumption and assets can be chosen freely, but this is a general issue and shouldn’t preclude finding a particular one if starting at it (or very close to it)?
Is this type of problem meaningfully analysed with Dynare or should I use general Matlab coding to find the solution to the dynamic programming problem via value function iteration?
Thanks for your help,
endowment.mod (488 Bytes)