Hi all. I have an economy which transits from one steady state to another in , e.g., 10 years. In my baseline, the government can gradually increase VAT rate (to finance whatever policy). I now want to focus on the first few years of my transitional dynamic whereby changing VAT rate may not be politically feasible. The government issue bonds to finance whatever policy instead.
Am I right solving the model for the entire transitional path but having the government issue debt instead and make analyses based on what happens in the first 2-3years?
With perfect foresight simulations, you always need to simulate the full transition path to the new steady state and then select the periods of interest.
Thank you for the reply. I think I didn’t phrase the question and the topic well.
I am working with a perfect foresight economy whereby the government announced that the policy will be financed by increase in VAT. However, in the first 1-3 years, it turns out government has to issue debt to finance the policy due to some difficulty. Later, they should be able to increase VAT as announced.
Will perfect_foresight_with_expectation_errors_solver help me solve the problem? Or do you suggest regime switching?
You need to elaborate further. What is the informational assumption you are making? Regime switching would imply that people expected this to happen with some probability. perfect_foresight_with_expectation_errors_solver sounds like the more correct version.
Issuing bonds is not foreseen. So it’s perfect_foresight_with_expectation_errors_solver.
I wonder if it’s possible to simulate all of these in the environment whereby agents expect transition from one steady state to another due to permanent and gradual increase in, say augmented factor productivity.
I have never really work with a model with government debts and fiscal rule before. Do you have any advises for this exercise?