On the stability of the Ramsey accumulation path

Enrico Bellino

MPRA Paper from University Library of Munich, Germany

Abstract: The Ramsey (1928) accumulation path is characterized as a saddle-path in the standard presentations of the model based on the works of Cass (1965) and Koopmans (1965). From a mathematical stance a saddle-path is unstable: if the system is exactly on that path, it converges to the steady state of the system; if it diverges slightly from that path, it shifts indefinitely from the steady state. The 'transversality' condition is then invoked in the Ramsey model to prevent the system from following such divergent paths; from the economical point of view this condition can be interpreted as a perfect foresight assumption. This kind of instability, which is typical of infinite horizon optimal growth models, has been sometime considered to account for actual economic crises. The claim would seem to be grounded on the idea that if the consumer optimizes myopically, i.e., by only considering the current and the subsequent period, the ensuing dynamics diverges almost surely from the steady state equilibrium. Convergence requires perfect foresight. The present work aims to challenge this conclusion, which seems not inherent to the choice problem between consumption and savings, but it is due to the presumption that the consumer must face this problem in an infinite horizon setting. The Ramsey problem of selection of the accumulation path will be re-proposed here within a framework where consumer's ability to optimize over the future is assumed to be imperfect. However, the ensuing path will converge to the steady state, without assuming perfect foresight. Myopia is thus not ultimately responsible for the instabilities of the 'optimal' accumulation path. Explanations of instability phenomena of actual economic systems (crises, bubbles, etc.) must be sought in other directions, probably outside the strait-jacket of the optimization under constraint.

Keywords: Ramsey model; transversality condition; bounded rationality; convergence; saddle path (search for similar items in EconPapers)
JEL-codes: B22 E21 E22 (search for similar items in EconPapers)
Date: 2013-01-28
New Economics Papers: this item is included in nep-dge, nep-hpe and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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