Predetermined interest rates in an analytical RBC model

Patrick Fève, Alban Moura and Olivier Pierrard

No 123, BCL working papers from Central Bank of Luxembourg

Abstract: We solve a version of the analytical Real Business Cycle (RBC) model with a predetermined rate of return on household saving. The solution differs from that of the benchmark RBC model along two dimensions: (i) Policy functions depend on the variance of the technology shock. (ii) There is a suboptimal pattern of excess saving. We discuss the economic intuition underlying these properties. We also demonstrate that unconditional welfare can be higher in the suboptimal model with predetermined interest rates, providing a clear illustration of the pitfall with unconditional welfare comparisons.

Keywords: RBC model; predetermined interest rates; over-saving; conditional and unconditional welfare. (search for similar items in EconPapers)
JEL-codes: E13 E21 E32 E43 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2018-09
New Economics Papers: this item is included in nep-dge and nep-mac
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Published in Economics Letters, 2018, 172: 12-15.

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Related works:
Journal Article: Predetermined interest rates in an analytical RBC model (2018)
Working Paper: Predetermined Interest Rates in a Analytical RBC model (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:bcl:bclwop:bclwp123

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