What is the effect of an exogenous variable with no innovations in a perfect foresight environment?

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,

perfectforesight_3eq_GovExp.mod (848 Bytes)
perfectforesight_3eq.mod (757 Bytes)

rplot plots the model including the initial and terminal condition, if necessary. With a lagged endogenous variable, the initial condition will be present, resulting in a plot that is longer by one period. That’s the part you were worrying about. But after that initial (meaningless) period, the simulations are the same, as should be expected.

Hello jpfeifer,

Unfortunately that is not the issue I was referring to. When I run both .mod files, I get the following simulated paths. On the left is perfectforesight_3eq.mod, and on the right perfectforesight_3eq_GovExp.mod. As you can see, the evolution is not the same for any of the variables.

Thank you for your help.

Are you using Dynare 5.3?

I am using Dynare 4.6.4

Please upgrade. I suspect there was a bug.


You are right, with the new version it now works.

Thank you!