Transition path with a lower bound

Perfect foresight simulations
1

Hi,

I am running a model from an initial state to a final steady state, there are two sectors, during the transition process capital would shift from sector a to sector b, capital a would hit a lower bound. My problem is that it would quickly hit the lower bound in one period. But without the lower bound the transition would go smoothly, why would a lower bound make the transition shoot in the first place?

I am using lmmcp to solve this model, do you have any suggestions to fix the shooting problem?

Thanks very much for your help in advance.

model_land_house_trans_LcLh_bnd.mod (29.1 KB)

2

Without knowing the model, it is hard to tell. But usually transitions are smooth, because agents care about consumption smoothing. Many frictions prevent exactly that, i.e. force agents to adjust quickly, although they would prefer a smoother path.