Add premium on domestic interest rates depending on domestic public debt.

mod/common/endogenous-variables.inc

@@ -27,6 +27,8 @@ KP
 GAMMAPRC
 GAMMAPRI
 GAMMABW
+GAMMAB
+REFF
 YDZE
 YDRZE
 PIZE

mod/common/estimated-parameters.inc

@@ -20,6 +20,7 @@ gammac,             GAMMA_PDF,    2.5,      1;
 gammai,             GAMMA_PDF,    2.5,      1;
 gammapi,            NORMAL_PDF,   1.7,      0.1;
 gammay,             BETA_PDF,     0.5,      0.2;
+gammab,             BETA_PDF,     0.001,    0.01;
 FBAR,               BETA_PDF,     0.0075,   0.00375;
 
 rhotauc,            BETA_PDF,     0.75,     0.10;

mod/common/initial-values.inc

@@ -20,6 +20,7 @@ gammac,1.110787 ;
 gammai,1.697801 ;
 gammapi,1.732484 ;
 gammay,0.895491 ;
+gammab,0.001 ;
 FBAR,0.009991 ;
 rhotauc,0.926178 ;
 rhotaun,0.918729 ;

mod/common/mars_steadystate.source

@@ -14,6 +14,7 @@ GAMMAI=0;
 GAMMAU=0;
 COSTI=0;
 GAMMABW=0;
+GAMMAB=0;
 GAMMAX=0;
 GAMMAPRC=0;
 GAMMAPRI=0;
@@ -37,6 +38,7 @@ ZETAI=ZETAIBAR;
 
 A=Z^(1-alpha)*MU^(-alpha);
 R=PI*Z/beta;
+REFF=R;
 RW=R;
 PIW=PI;
 

mod/common/model.inc

@@ -15,8 +15,12 @@ C=(1-omega)*CR+omega*CNR;
 % Intra-households tranfers
 iota*TNR=(1-iota)*TR;
 % Euler equation for domestic public bonds 
-LAMBDA=beta*LAMBDA(+1)/Z(+1)*R/PI(+1);
-% Euler equation for foreign public bonds 
+LAMBDA=beta*LAMBDA(+1)/Z(+1)*REFF/PI(+1);
+% Domestic financial intermediation premium
+GAMMAB=gammab*(XIB^(1/gammab)*exp(B-BBAR)-1);
+% Effective nominal interest rate
+REFF=(1+GAMMAB)*R;
+% Euler equation for foreign public bonds
 LAMBDA=beta*LAMBDA(+1)/Z(+1)*RW*(1-GAMMABW)/PI(+1)*DELTAEX(+1);
 % External financial intermediation premium
 GAMMABW=gammabw*(XIBW^(1/gammabw)*exp(EXBW/YD)-1);
@@ -48,13 +52,13 @@ GAMMA=OMEGABAR*(1-F)+G;
 GAMMAPR=(1-F);
 GPR=(OMEGABAR*normpdf((log(OMEGABAR)+SIGMA(-1)^2/2)/SIGMA(-1))/OMEGABAR/SIGMA(-1));
 % FOC for capital
-0=(1-GAMMA(+1))*RK(+1)/R+GAMMAPR(+1)/(GAMMAPR(+1)-mu*GPR(+1))*(RK(+1)/R*(GAMMA(+1)-mu*G(+1))-1);	
+0=(1-GAMMA(+1))*RK(+1)/REFF+GAMMAPR(+1)/(GAMMAPR(+1)-mu*GPR(+1))*(RK(+1)/REFF*(GAMMA(+1)-mu*G(+1))-1);	
 % Return of entrepreneurs
 RK=PI/(Z*MU)*((1-delta)*Q+(RENTK*U-PIOP*GAMMAU)*(1-tauk)+PIOP*delta*tauk)/Q(-1);
 % Zero profit condition
-Q(-1)*KP(-1)*(RK)*((1-mu)*G+OMEGABAR*(1-F))/(N(-1)*R(-1))-Q(-1)*KP(-1)/N(-1)+1=0;
+Q(-1)*KP(-1)*(RK)*((1-mu)*G+OMEGABAR*(1-F))/(N(-1)*REFF(-1))-Q(-1)*KP(-1)/N(-1)+1=0;
 % Law of motion of net worth
-N=GAMMAN/(PI*Z)*(RK-R(-1)-mu*G*(RK))*KP(-1)*Q(-1)+we+GAMMAN*(R(-1))*N(-1)/(PI*Z);
+N=GAMMAN/(PI*Z)*(RK-REFF(-1)-mu*G*(RK))*KP(-1)*Q(-1)+we+GAMMAN*(REFF(-1))*N(-1)/(PI*Z);
 
 %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%
 % INTERMEDIATE GOODS PRODUCERS
@@ -137,9 +141,9 @@ YDZE=YD^shfr*YDRZE^(1-shfr);
 % Taylor rule
 R/steady_state(R)=(R(-1)/steady_state(R))^rhor*((PIZE/PIBAR)^(gammapi)*(YDZE/YDZE(-1))^(gammay))^(1-rhor)*exp(XIR);
 % Government budget constraint
-B=GC/YD+GI/YD+T/YD+OTHGOV/YD+R(-1)*B(-1)*YD(-1)/(PI*YD*Z)-tauk*(U*RENTK-PIOP*(GAMMAU+delta))*KP(-1)/(YD*Z*MU)-(TAUN+TAUWH+TAUWF)*W*LD/YD-TAUC*PCOP*C/YD-TAULS/YD;
+B=GC/YD+GI/YD+T/YD+OTHGOV/YD+REFF(-1)*B(-1)*YD(-1)/(PI*YD*Z)-tauk*(U*RENTK-PIOP*(GAMMAU+delta))*KP(-1)/(YD*Z*MU)-(TAUN+TAUWH+TAUWF)*W*LD/YD-TAUC*PCOP*C/YD-TAULS/YD;
 REVGDP = tauk*(U*RENTK-PIOP*(GAMMAU+delta))*KP(-1)/(YD*Z*MU)+(TAUN+TAUWH+TAUWF)*W*LD/YD+TAUC*PCOP*C/YD+TAULS/YD;
-TOTGOVGDP = GC/YD+GI/YD+T/YD+OTHGOV/YD+(R(-1)-1)*B(-1)*YD(-1)/(PI*YD*Z);
+TOTGOVGDP = GC/YD+GI/YD+T/YD+OTHGOV/YD+(REFF(-1)-1)*B(-1)*YD(-1)/(PI*YD*Z);
 GOVGDP = GC/YD+GI/YD+T/YD+OTHGOV/YD;
 BALGDP = REVGDP - TOTGOVGDP;
 PRIMBALGDP = REVGDP - GOVGDP;

mod/common/parameters.inc

@@ -70,6 +70,7 @@ gammac $\gamma c$ (long_name='Adjustment cost in imported consumption', measure=
 gammai $\gamma i$ (long_name='Adjustement cost in imported investment', measure='economic param')
 gammapi $\gamma_{\pi}$ (long_name='Monetary policy weight on inflation', measure='economic param')
 gammay $\gamma_{y}$ (long_name='Monetary policy weight on output growth', measure='economic param')
+gammab $\gamma_{b}$ (long_name='Elasticity of spread of	 government bond', measure='economic param')
 FBAR $F(\omega)$ (long_name='Steady state probability of default', measure='economic param')
 
 rhopirze

mod/common/values-for-estimated-parameters.inc

@@ -20,6 +20,7 @@ gammac = 1.110787;
 gammai = 1.697801;
 gammapi = 1.732484;
 gammay = 0.895491;
+gammab = 0.001;
 FBAR = 0.009991;
 rhopirze = 0.8;
 rhoydrze = 0.8;

mod/mars-simul/mars.mod

@@ -21,5 +21,5 @@ steady;
 
 check;
 
-stoch_simul(order=1,irf=100) YD C I LD W PI R B GC EXBW M X RW GAMMABW MC;
+stoch_simul(order=1,irf=100) YD C I LD W PI R REFF B GC EXBW M X RW GAMMABW MC GAMMAB;