jpfeifer wrote:Hi, I think there are two problems. First, Lambda has the wrong timing. It seems to be an auxiliary variable for the stochastic discount factor. Hence, there should be no (+1). The problem is that it does not appear as a variable in the current period. Second, Ricardian equivalence seems to hold in your model, meaning that lump sum transfers t and bonds b cannot be determined individually. As they are perfectly collinear, this might be the reason for the near singularity warning. What is missing may be an exogenous process for t. Finally, I am not sure about the timing of r. Having it predetermined seems a bit strange.
Hey, sorry for the late reply, and thanks
You are right, there are some timing mistakes. But even correcting for them I could not get a solution.
After trying every possible combination (I am not proud of it!), finally I decided to get rid of bonds (and the associated interest rate) and taxes, and so I got rid of 3 variables and 2 equations (the government budget constraint and the interest equation from the household optimality conditions). Once that was done I could get rid of the resource constraint (which is derived using the household budget constraint and the firm's profit equation) and everything worked fine.
I was thinking this was the problem: I had an equation (resource constraint) which is a linear combination of two other equations, and hence my matrix was singular. I thought that this could be due to two problems:
1. The interest rates (r and rk) are the same, so bonds are redundant as a source of savings
2. I was missing an equation.
Your suggestion that maybe tax is the source of the problem and that I am missing the process for why seems reasonable and I will investigate that (I remember trying to get rid of taxes and not getting an answer, but it might have been due to the wrong timings).
Again, I really appreciate the help
