I have this model in which public sector collects taxes (T). Every period it gives f*T as transfers and and “saves” the rest (1-f)*T where f>0. The amount saved is given as transfers next period (with interest). Like this:
x = taxwl;
transfers = (1-f)x + f(1+r)x(-1);
k = s + fx;
Now here’s the problem. I want to set a deterministic shock such that f=0. But what happens here, is that a part of capital kind of “disappears” so that the feasibility constraint ( y = k - (1-delta)k(-1) + c)
does not apply in period 2 (if the shock is introduced in period 1). The feasibility constraint is wrong exactly by fx. I was thinking about introducing a separate fund that is alive for 1 period only to fix the problem. But it doesn’t work, as the agents also take all this into account. Anyone have any ideas how to go around this problem?