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

Enrico Bellino (), Secondo Autore (), Terzo Autore () and Quarto Autore ()
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Enrico Bellino: DISCE, Università Cattolica
Secondo Autore: DISCE, Università Cattolica
Terzo Autore: DISCE, Università Cattolica
Quarto Autore: DISCE, Università Cattolica

No dises1836, DISCE - Quaderni del Dipartimento di Scienze Economiche e Sociali from Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE)

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.

Keywords: Optimal capital accumulation; Ramsey-Cass-Koopmans model, saddle-path (in)stability; myopic behaviour; temporary equilibrium. (search for similar items in EconPapers)
JEL-codes: C61 D15 D50 E13 E21 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2018-06
New Economics Papers: this item is included in nep-mac
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