Predetermined Interest Rates in a Analytical RBC model

Patrick Fève, Alban Moura and Olivier Pierrard
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Patrick Fève: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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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: Conditional and unconditional welfare; Over-saving; Predetermined interest rates; RBC model (search for similar items in EconPapers)
Date: 2018-08-13
Note: View the original document on HAL open archive server: https://hal.science/hal-05528470v1
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Published in Economics Letters, 2018, 172, pp.12-15. ⟨10.1016/j.econlet.2018.08.011⟩

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Related works:
Journal Article: Predetermined interest rates in an analytical RBC model (2018)
Working Paper: 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:hal:journl:hal-05528470

DOI: 10.1016/j.econlet.2018.08.011

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