Too large steady state value for debt

Hi, I have a model question about steady state values. In my model all steady state values are sensible except foreign debt.

|c || 0.346244|
|tb || -0.062816|
|rd || 0.00456|
|d || 60.2482|

what might be the problem?


You are the model builder. The steady state for debt will depend on the model features you put in and the parameters you used.

I was expecting high deftness but this is too much. These results are based on Bayesian estimation. I wonder if it is problematic…

Are you sure that the relationship between foreign debt and tb is correct ?

thank you very much for your response! The problem was I wrote trade balance to output ratio instead of trade balance in debt defining equation.

Thank you!!!

one follow up question than. In the model there is non tradable goods sector which small open economy takes as given. So how come a domestic shock like TFP or interest shock have effect on externally determined prices ?

I don’t understand what do you mean by 'externally determined prices '. In such models, the relative price is a function of both tradable and non tradable consumptions and then tradable and non tradable output. Even if non tradable output is exogenous, domestic shocks will affect tradable goods prices and then the relative price, and then non traded goods prices. I don’t know if it is the right answer you are looking for I hope it helps.

the model consists of 3 sectors: tradable goods, non tradable goods and final good (use tradable and non tradable goods as inputs with ces function ). In model set up we assume tradable goods are subject to law of one price and prices are determined externally. small economy cannot influence price of tradable good. this is what I mean by externally determined price. I am new to these models especially multi sector ones. so it may be an obvious question but I couldn’t understand how to interpret irfs. help would be appreciated.

Ok I see, with the law of one price the price of tradables is the product of exchange rate and foreign prices . domestic shocks affect the exchange rate, that why tradable prices are also affected.

actually this is what confuses me. According to chapter 8 of Schmitt-hrohe and Uribe open economy macro book those are identical.

Express P the domestic price of consumption as a function of tradable goods price Ptau and non tradable price Pn. You will see the difference. Think about the relative price, the real exchange rate, and the Euler equation

Dear i.lagrine, could you please elaborate? I am trying to understand the effect of a world interest shock on real exchange rate couldn’t figure out why it depreciates as a response…

Define the relative price and the real exchange rate, figure out their relationship.
Define the relative price and consumption of tradable and non tradables goods (Euler equation)
Figure out how the economy reimburses its debt via the current account and the trade balance!
You will see, that a positive world interest rate shock (an increase) would tighten financial conditions of households , consequently tradable goods consumption will decrease ( Euler equation). The relative price is an increasing function of tradable goods’ consumption, consequently therefore, the relative price will decline. and then deduce how the real exchange rate will move.

thank you very much for your quick and informative responses.

nirfrstar1.eps (40.6 KB) nirfrstar2.eps (40.5 KB)

positive interest shock indeed decreases borrowing, and working capital constraint increases both tradable and nontradable goods production by increasing the cost of production. However, as you can see the production of tradable goods increases. in my opinion, this is due to the increase in the price of tradable goods. sectoral asymmetry should arise from prices. maybe I have a problem in understanding in which order the variables affect each other…

nirfstar3.eps (40.9 KB)

and working capital constraint increases both tradable and nontradable goods production by increasing the cost of production.

sorry this should be decrease both radable and nontradable goods production by increasing the cost of production.

Can you share your mod-file ?

model.mod (18.7 KB)

Of course, there you go. Thank you very much…

Both traded and non traded output are endogenous in your model. What was your question ? there is no law of one price in your model both pt and pn are endogenously determined