Blanchard Kahn not satisfied: no stable equilibrium

[zsm]

Hi,

when I run the attached code (a New Keynesian model with heterogenous firms), I get the following error message:

There are 18 eigenvalue(s) larger than 1 in modulus
for 18 forward-looking variable(s)

The rank condition is verified.

Error using print_info (line 40)
Blanchard Kahn conditions are not satisfied: no stable equilibrium

Error in stoch_simul (line 81)
print_info(info, options_.noprint);

Error in Family_IRF_highgamma_kappaF_govBC_rev (line 539)
info = stoch_simul(var_list_);

Error in dynare (line 120)
evalin('base',fname) ;

I know that it might mean that one equation is redundant (usually an issue with the market clearings and the budget constraints) and another equation is missing. But the fact is that I only include the household and government budget constraints and the profit functions of the firms, and no additional resource constraint is added, so I am wondering that the error message might be related to smething else.

Could you please have a loook at the code and give me some hint how to find the mistake?

Thanks!

[jpfeifer]

Use model_diagnostics. It will tell you

model_diagnostic: the Jacobian of the static model is singular
there is 1 colinear relationships between the variables and the equations
Colinear variables:
B
Colinear equations
Columns 1 through 30

5 6 7 8 9 10 11 12 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 34 36 37 38

Columns 31 through 43

39 40 41 42 44 45 46 47 48 49 51 52 53

The presence of a singularity problem typically indicates that there is one
redundant equation entered in the model block, while another non-redundant equation
is missing. The problem often derives from Walras Law.

If B is bonds, you might have problems with Ricardian equivalence.

[zsm]

Yes, I have also realised that the issue might be with B.

The reason might be that B which is indeed bonds, savings of the household is zero in every period, not only in the SS, so I guess it cannot be included in the model at all.

So I dropped B. But then I have one more equations than the number of variables, so I should drop a shock equation, too. But I cannot as I need all the shocks.

Also, if I redefine B as government bonds and than this way B should enter not only the HH BC, but also the gov BC, I still get the same error message, although neither the SS of B, nor the dynamic valeus of B are zero.

Can you suggest me how to solve this issue? What am I missing here?

Thanks!

[jpfeifer]

You should start from the most simple model and go from there. You already have one equation too much, namely that B=0. You can not have B in the model. But due to Walras law, one market clearing condition is redundant. Usually, the government budget constraint should be implied by the private one. Try dropping it.