How to recover the bonds when G exogenous

[vero_acurio]

Hello,

I have a model where I suppose that the government function is exogenous, like:

log(G)=(1-rhog)*(log(omega)+log(Ys)) + rhog*log(G(-1)) + eg;

(Ys stands for the steady state of Y).

I have also the equation:

C+I+G=Y

And into my model I have underline that:

G = B - (1+i(-1))*B(-1);

(That's why I can have the first equation!)

In dynare, if I don't declare B, this last equation doesn't exits and everything works. The problem rises when I want to know what happend with the bonds, and I add the budget constraint. Dynare shows:

??? Error using ==> print_info at 40
Blanchard Kahn conditions are not satisfied: no stable
equilibrium

Error in ==> stoch_simul at 81
print_info(info, options_.noprint);

Error in ==> BGCapitalexoCalvoG at 307
info = stoch_simul(var_list_);

Error in ==> dynare at 120
evalin('base',fname) ;

Does anyone know what is the problem here?

Thanks for your help.

Best Regards,

Veronica

[jpfeifer]

The problem is simple: there exists no finite solution in this case as there is nothing that assures government solvency. Bonds just explode and go to plus or minus infinity. If a positive shock hits, the government increases debt and has forever higher interest payments. As taxes and spending do not react to this higher debt, the only way the government can pay additional interest is by borrowing more, i.e. running a Ponzi-scheme.