A new solution to an old problem: a temporary equilibrium version of the Ramsey model

Research output: Working paper

Abstract

Convergence toward the optimal capital accumulation path in infinite horizon has always been tackled in the literature by means of the assumption that individuals (or a central planner) are able to select the unique convergent (saddle-)path among the infinitely many paths which satisfy the equi-marginality condition of the intertemporal choice problem (the Euler’s condition). This is tantamount to assuming that individuals have 'colossal' rational capabilities. Conversely, any minor deviation from the saddle-path would inevitably lead to a crash on a 0 per-capita consumption path. This paper aims to show that this contraposition is false. An asymptotic convergence result to the optimal equilibrium path will be obtained for an individual who plans myopically, that is, that optimizes his present and future consumption levels under a rudimentary hypothesis about future savings. He then partially readjusts his choices in each subsequent period, like people normally do. A similar result was already proved by the author for the central planner problem. In this paper, a 'market' solution is provided, following a temporary equilibrium approach à la Hicks.
Original languageEnglish
PublisherVita e Pensiero
Number of pages28
ISBN (Print)978-88-343-3760-8
Publication statusPublished - 2018

Keywords

  • Optimal capital accumulation
  • Ramsey-Cass-Koopmans model
  • myopic behaviour
  • saddle-path (in)stability
  • temporary equilibrium

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