Steady State Solved, but System has a Unit Root

[Henry.Austin]

Dear Professor,

May I request identifying which equation has caused a unit root in my model and why. My steady state was calculated numerically using fsolve.

Please find atfached a .mod file:

Kind Regards,
Henry

UC.mod (3.9 KB)

[jpfeifer]

The first immediate issue is:

MODEL_DIAGNOSTICS: The following endogenous variables aren’t present at the current period in the model:
K

[Henry.Austin]

Dear Professor,

I have since updated my code to amend this.

Do you know which equation is likely causing the unit root error?

UC.mod (3.9 KB)

Kind Regards,
Henry

[jpfeifer]

I don’t know, but my hunch is something along the lines of

Colinearity in a two-households-model due to similar euler equations

No, I am saying that there might be something like the permanent income hypothesis at work. Any shock that moves the debt position will move it permanently and there is no tendency to return to the old level. That is a common thing happening under perfect foresight. Things usually change under stochastics. For example, the unit root in small open economy models vanishes when agents take future shocks into account. The same happens in consumption Euler equations due to Jensen’s Inequality.