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

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Abstract

According to the prevailing literature on capital accumulation with infinite horizon, convergence toward the optimal path requires that individuals are able to select the unique convergent (saddle) path. 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 onto a zero per-capita consumption path. This paper aims to show that this contraposition is false. It will be proved that an asymptotic convergence result to the Ramsey steady state path is obtained for an individual who optimizes his present and future consumption levels step by step in each period, gauging the costs and benefits of current savings on future consumption levels, momentarily assumed to be equal to net income (this assumption of future zero-net savings is then revised at each subsequent period). A ‘‘market’’ solution is here provided, using a temporary equilibrium approach à la Hicks.
Original languageEnglish
Pages (from-to)285-300
Number of pages16
JournalRivista Internazionale di Scienze Sociali
Volume2020
DOIs
Publication statusPublished - 2020

Keywords

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

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