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Dear all,

I am trying to run the RBC model which consists of households,intermediate goods firms and finals goods firms. The thing that I want to see is how the economy reacts to the shock in foreign price good which is used in production of the final good. I have been trying to model it for 3 weeks but for some reason it doesn't work. Could you please tell me what am I doing wrong or suggest some method? I have attached the mod file

Thank you!

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// 1.Preamble

var c lab wage k r d lm rp y dt pm ystar inv z;


varexo epsz;

parameters alpha pstar psi beta dbar rstar sigmaz rhoz lambda mu delta theta ;

// 2.Calibration

theta =0.36;
psi     = 0.001;
beta    = 0.87;
dbar    = 0.007;
rstar   = (1/beta)-1;
lambda = 0.61;
mu=0.69;
alpha= 0.32;
delta   = 0.1255;
rhoz   = 0.765;
sigmaz = 0.027;
pstar =1 ;

ky = alpha/(1/beta - 1 + delta);
cy = 1- ky*delta;

// 3.Model

model;

//HOUSEHOLDS:

lm = (theta/c);                               // 1 FOC wrt Ct Marginal Utility of Consumption

1-theta/1-lab= lm*wage;                       // 2 FOC wrt Lt Labor Supply

lm = lm(+1)*beta*(dt(+1)-delta+1);           // 3 FOC wrt Kt  Euler Equation for Capital

lm = lm(+1)*beta*(1+r(+1));                  // 4 FOC wrt Dt    Euler Equation for Bonds

rp = psi*(exp(d(-1)-dbar)-1);                // 5 Given in Grohe model

r = rstar + rp;                              //  6 Given in Garcia Cicco Model


// INTERMEDIATE GOODS FIRM:

alpha*y/k(-1)= dt;                           //  7 FOC wrt Kt Demand for capital

(1-alpha)*y/lab = wage;                      //  8 FOC wrt Lt  Labor Demand



// FINAL GOODS PRODUCING:

(lambda*y^(mu)+(1-lambda)*ystar^(mu))^((1/mu)-1)*lambda*(y^mu-1)= pm;           // 9 Demand for domestic input

(lambda*y^(mu)+(1-lambda)*ystar^(mu))^((1/mu)-1)*(1-lambda)*(ystar^mu-1)= exp(z)*pstar; //  10 Demand for foreign input


//MARKET CLEARING

c+inv+d = wage*lab+dt*k(-1)+d(-1)*(1+r); // 11 Household budget Constraint

k = (1-delta)*k(-1)+inv;            // 12 Law motion of Capital

y = (k(-1)^alpha)*(lab^1-alpha);   // 13 Intermediate Goods Sector




// FOREIGN PRICE SHOCK

z = rhoz*z(-1) + epsz;    // 14

end;


// 4.Computation of the steady state

initval; //          pm pstar mstar  z;


lab = 1/(1+ cy*theta);
y = ky^(alpha/(1-alpha))*lab;
k=ky*y;
c=cy*y;
inv = delta*k;
wage = (1-alpha)*y/lab;
lm = theta/c;
dt = (1/beta-1+delta);   
r = rstar;
d = dbar;
rp =0;         
pm=pstar;
z = 0;
ystar = ((y^mu-1)*lambda/1-lambda)^1/mu-1;
 
end;

// 4.Shocks

shocks ;
var epsz = sigmaz^2;
end;

%check;
resid(1);
steady(solve_algo=0);

stoch_simul(periods=10000,irf=100,order=1);



Please check your steady state. While Dynare is able to find a solution to the non-linear system of equations, there might be several solutions.

Here, consumption is much bigger than output. The reason might be the typo in your production function

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    y = (k(-1)^alpha)*(lab^1-alpha);   // 13 Intermediate Goods Sector


There is a bracket missing around (1-alpha)