Propensity to Consume and the Optimality of Ramsey-Euler Policies

Tapan Mitra and Santanu Roy

No 2007, Departmental Working Papers from Southern Methodist University, Department of Economics

Abstract: In a general one-sector optimal stochastic growth model where the production technology may be globally unproductive or may allow for unbounded growth, a policy function satisfying the Ramsey-Euler condition may not be optimal even if consumption and investment are continuous and increasing in output. We outline verifiable sufficient conditions for optimality that do not require checking the transversality condition. In addition to continuity (or monotonicity), these conditions impose lower bounds on the propensity to consume. In the case of production functions with multiplicative shocks, the consumption propensity needs to be bounded away from zero; a similar condition is sufficient for more general production functions if the utility function belongs to a restricted class.

Keywords: Stochastic growth; optimal economic growth; uncertainty; unbounded growth; unproductive technology; transversality condition; optimality conditions; Euler equation. (search for similar items in EconPapers)
JEL-codes: C6 D9 O41 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-dge, nep-gro and nep-upt
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Journal Article: Propensity to consume and the optimality of Ramsey–Euler policies (2022)
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