Hello, I’m trying to calculate the value function in Dynare. But I get a divergent value function: value function for fixed consumption path (with <1 discount factor) is divergent. I’m trying to pin down the source of the problem. I find that I can replicate the problem in a simple PIH model. After a permanent shock to income, the consumption would just to a new level and stay there. Therefore the value function is expected and discounted sum of (CRRA) utility from the consumption, which should give a fixed number. But Dynare gives me a divergent IRF for the value function.
I don’t know if it’s because that I can’t use the bellman equation to calculate value function in Dynare or it’s something else like Jensen’s inequality as Dynare gives averaged IRF. Any comment is very much appreciated. Thanks.
simulationPIH.mod (698 Bytes)