Propensity to consume and the optimality of Ramsey–Euler policies

Tapan Mitra and Santanu Roy

Economic Theory, 2022, vol. 73, issue 1, No 2, 55-89

Abstract: Abstract In a general one-sector optimal stochastic growth model where the production technology may be globally unproductive or allow for unbounded growth, we outline readily verifiable sufficient conditions for optimality that do not require checking the transversality condition. An interior policy function satisfying the Ramsey–Euler condition may not be optimal even if consumption and investment are continuous and increasing in output; our conditions for optimality require that the policy function must also satisfy a lower bound on the propensity to consume. For 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: 2022
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Citations: View citations in EconPapers (2)

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Working Paper: Propensity to Consume and the Optimality of Ramsey-Euler Policies (2020)
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DOI: 10.1007/s00199-020-01325-6

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