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Ramsey Equilibrium with Liberal Borrowing

Robert Becker, Kirill Borissov () and Ram Dubey ()

No 2015-003, CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: This paper considers a multi-agent one-sector Ramsey equilibrium growth model with borrowing constraints. The extreme borrowing constraint used in the classical version of the model, surveyed in Becker (2006), and the limited form of borrowing constraint examined in Borissov and Dubey (2015) are relaxed to allow more liberal borrowing by the households. A perfect foresight equilibrium is shown to exist in this economy. We describe the steady state equilibria for the liberal borrowing regime and show that as the borrowing regime is progressively liberalized, the steady state wealth inequality increases. Unlike the case of a limited borrowing regime, an equilibrium path need not converge in the case of liberal borrowing regime. We show through an example that a two period cyclic equilibrium exists when agents are allowed to borrow against their two period future wage income. This result is similar to the possibility of non-convergent equilibrium capital stock sequences in the model with no borrowing.

Keywords: Convergence; Existence; Gini Coefficient; Growth; Heterogeneous agent; Liberal borrowing; Turnpike property (search for similar items in EconPapers)
JEL-codes: C61 D61 D90 O41 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2015-09
New Economics Papers: this item is included in nep-dge
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