Hi all,

I am trying to understand why these two .mod files give different results.

perfectforesight_3eq.mod, contains a simple NKM. I am imposing a path for inflation, the plots of the state variables are in line with what one would expect from the theory.

However perfectforesight_3eq_GovExp.mod gives completely different dynamics. I am imposing the exact same values for inflation and the models are the same, except that in the second .mod file I introduced government expenditure as an AR(1) shock. I did not impose any path for government expenditures innovations, therefore gov. expenditure is equal to 0 in every period. But for some reason, consumption decreases and slowly reaches the steady state, when in the previous .mod file it goes in the opposite way.

I understand that in a perfect foresight experiment in which agents know that gov. expenditure is zero, the result of both experiments should be the same (also considering that it is c and not y that enters the model equations).

Thank you in advance,

Mario

perfectforesight_3eq_GovExp.mod (848 Bytes)

perfectforesight_3eq.mod (757 Bytes)