Convergence problem in International Business Cycle Model

[adeem]

Hi,

I am running dynare and getting the following error message for the attached model:

Configuring Dynare ...
[mex] Generalized QZ.
[mex] Sylvester equation solution.
[mex] Kronecker products.
[mex] Sparse kronecker products.

Starting Dynare ...
Starting preprocessing of the model file ...
6 equation(s) found
Processing derivation ...
Processing Order 1... done
Processing Order 2... done
Processing outputs ...
Preprocessing completed.
Starting Matlab computing ...


SOLVE: maxit has been reached

SOLVE: Iteration 2
Spurious convergence.
27.4140
27.4140
2.7991
-28.1887
0.0000
0.0000

??? Error using ==> steady_ at 77
STEADY: convergence problems

Error in ==> steady at 52
steady_;

Error in ==> IBC at 114
steady;

Error in ==> dynare at 102
evalin('base',fname) ;


Here is the .mod file:


// International Business Cycle Model
//Preamble

var c1 c2 k1 k2 a1 a2;
varexo e1 e2;
parameters gamma delta alpha beta rho;

gamma=2;
delta=0.05;
alpha=0.4;
beta=0.98;
rho=0.85;

// Model - spell out equations of the model

model;
c1=c2;
(c1)^(-gamma)=beta*(c1(+1)^(-gamma))*((alpha*a1(+1)*k1^(alpha-1))+1-delta);
(c2)^(-gamma)=beta*(c2(+1)^(-gamma))*((alpha*a2(+1)*k2^(alpha-1))+1-delta);
(a1*k1(-1)^alpha)+(a2*k2(-1)^alpha)=c1+c2+k1-(k1(-1)*(1-delta))+k2+(k2(-1)*(1-delta));
a1=rho*a1(-1)+e1;
a2=rho*a2(-1)+e2;
end;

// Steady state or initial values

initval;
k1=2.8;
k2=2.8;
c1=0.8;
c2=0.8;
a1=0;
a2=0;
e1=0;
e2=0;
end;


shocks;
var e1;
stderr 0.08;
var e2;
stderr 0.08;
end;

steady;

stoch_simul(dr_algo=0,periods=1000);

Kindly advise,

Adeem

[jpfeifer]

I would say your model is wrong. If the technology equations

Code: Select all

a1=rho*a1(-1)+e1;

are not in logs, i.e.

Code: Select all

log(a1)=rho*log(a1(-1))+e1;

their steady state is 0. If technology is zero, production is also 0, hence is consumption. Apart from this making no sense,

Code: Select all

(c1)^(-gamma)

results then in a division by 0.