deterministic model with occasionally binding constraint

[haidx2112]

Hi all,

I'm working with a deterministic model with occasionally binding constraint.
Is it possible?

The model is very simple now. utility function u=ln(c)
budget constraint is y+d=c+d(-1)*(1+r)
r is constant
d<=0.7*y

y will equal 1 in periods from 1 to 15 then at period 16 y will drop to 0.9 and stay there.

Many thanks for your help.

[jpfeifer]

It should be possible. Define y as an varexo and specify the process you describe. For the constraint, you should replace d by

Code: Select all

min(d,0.7*y)

[haidx2112]

Hi,
I tried this way. However, it doesn't work because the constraint is never binding. Therefore, consumption will drop then jump.
As I expected, consumption will reduce gradually (euler equation) then it jump back to the new steady state level.

[jpfeifer]

What do you mean with it does not work? If the system solves correctly then the problem is not the code but the fact that in your setup the variables are endogenously chosen so that the constraint does not bind. If this does not make economic sense, you need to rethink the setup.

[haidx2112]

actually, if consumption decreases gradually (constraint is not binding in adjustment period), the total utility will be greater than the case that consumption drop and jump to new steady state level. I assume that the discountfactor*(1+r)<1 individual is impatient.