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Hi all,

I have a question on the instrument variables in Ramsey policy. I want to use the command

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ramsey_policy

Suppose there is a single policy tool, tax rate T. Before the planner solves the Ramsey problem, given T, the economy could endogeneously determine Y, C, N, W, K, I, R, and so on (n variables in total).

In dynare, is T declared as an endogeneous variable? If T is an endogeneous variable, there are n+1 endogeneous variables but only n equations. Is that a problem?

And, how do I solve the steady state value of T. Or, the steady state value is arbitrarily given by myself?

And and...with command

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ramsey_policy

, dynare computes the first order conditions with respect to all endogeneous vairable, including the shock variable. Doesn't it?

When you provide an instrument, it is the Ramsey planner who chooses this value to maximize the objective. That is why you have one equation less than variables. Your job is to provide a steady state conditional on the value of the instrument. Think about it this way: Dynare gives you a value for T. Taking this value as given, you have to tell Dynare the analytical steady state for all other variables. See also http://www.dynare.org/phpBB3/viewtopic.php?f=1&t=8090

jpfeifer wrote:When you provide an instrument, it is the Ramsey planner who chooses this value to maximize the objective. That is why you have one equation less than variables. Your job is to provide a steady state conditional on the value of the instrument. Think about it this way: Dynare gives you a value for T. Taking this value as given, you have to tell Dynare the analytical steady state for all other variables. See also http://www.dynare.org/phpBB3/viewtopic.php?f=1&t=8090

Thank you, Professor, for your quick reply!

Following your guidance, I wrote a mod file, in which the steady_state_model block tells dnyare, given the instrument variables Tau and Ig, the analytical form of all endogeneous variable and some parameters. But it reports that
Undefined function or variable "ys".
Isn't ys automatically defined by dynare as the steady state?

Please provide the file.

jpfeifer wrote:Please provide the file.

Sorry, I forgot. The file is here. Thank you very much!

Please use the unstable version. I can run it there. Moreover, you need an initval block providing the starting values for the instruments, e.g.

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initval;
Ig=0.01;
Tau=0.01;
end;