Ramsey - Model.Advanced Macroeconomics I
Ramsey - Model.Advanced Macroeconomics I
Ramsey - Model.Advanced Macroeconomics I
Mototsugu Shintani
University of Tokyo
S1/S2 2018
Outline
6. Consumption
Euler equation in Ramsey model
I Recall in Ramsey model, the Euler equation is given by
u00 (ct )
ct = f 0 (kt ) δ ρ
u 0 ( ct )
I Also, in decentralized economy (no social planner) version of
Ramsey model, from …rm’s FOC, we have f 0 (kt ) = rt + δ and
u00 (ct )
ct = rt + δ δ ρ
u 0 ( ct )
= rt ρ
c1t θ 1
I For CRRA utility u(ct ) = 1 θ , Euler equation simpli…es to
ct 1
= (rt ρ)
ct θ
or
ct
= σ ( rt ρ)
ct
where σ = 1/θ
Fisher model
I Two-period (discrete) model of consumption
max u(c1 ) + 1+1 ρ u(c2 ) s.t. c1 + s = w and c2 = (1 + r)s
1
U = u(w s) + u((1 + r)s)
1+ρ
1 u 0 ( c2 ) 1+ ρ
I FOC ∂U
∂s = u 0 ( c1 ) + 0
1+ρ u (c2 )(1 + r) = 0) u 0 ( c1 )
= 1+r
1+ ρ
I In continuous time 1 + ρ r since
1+r
(1 + r)(1 + ρ r) = 1 + ρ r + r + rρ r2 1+ρ
u 0 ( c2 ) u0 (c2 ) u0 (c1 )
ρ r 1 =
u 0 ( c1 ) u 0 ( c1 )
u00 (c2 )(c2 c1 ) u00 (c2 )∆c
=
u 0 ( c1 ) u 0 ( c1 )
u00 (ct )
) ct = r ρ
u 0 ( ct )
Diamond model
I Overlapping-generations (OLG) model developed by
Samuelson (1958) and Diamond (1965)
I Two generation at the same time (discrete time) - young and
old
I young generation at t
1
max u(c1t ) + u(c2t+1 )
1+ρ
st = s(wt , rt+1 )
ct = Et ct+1
Solution to RE-PIH model
I Rearranging terms in budget constraint
At = (1 + r)At 1 + yt ct yields
(1 + r)At 1 = yt ct At
I Dividing by 1 + r and t 1 ! t yields
1 1
At = (1 + r) ( yt + 1 ct + 1 ) (1 + r) A t+1
I Substituting second equation into …rst equation, repeated
substitution and taking (conditional) expectation yields
Et [ (1 + r)At 1]
= Et (yt ct At )
h i
1 1
= Et yt ct + ( 1 + r ) (yt+1 ct + 1 ) (1 + r) A t+1
j
1 A t+j
= ∑j∞=0 Et (yt+j ct + j ) lim Et
1+r j! ∞ (1 + r)j
j
1
= ∑j∞=0 Et (yt+j ct + j )
1+r
Permanent income in RE-PIH model
I Substitute ct = Et ct+1 = = E t ct + j
j j
1 1
(1 + r)At 1 = ∑j∞=0 Et yt+j ∑j∞=0 ct
1+r 1+r
j
1 1+r
= ∑j∞=0 Et yt+j ct
1+r r
j+1
1 1
At 1 = ∑j∞=0 Et yt+j ct
1+r r
I Closed-form solution (permanent income at t)
" #
j+1
1
ct = r At 1 + ∑j∞=0
p
Et yt+j = yt
1+r
Implications of RE-PIH model: stationary income
yt = φyt 1 + εt
Et yt+j = φj yt
1 j+1
I Substitution in ∑j∞=0 1+r Et yt+j yields
j
1
∑j∞=0 1 1 1
φ
1+r 1+r yt = 1 + r 1 φ yt = 1 + r φ yt so that
1+r
1 p
ct = r A t 1 + yt = yt
1+r φ
Implications of RE-PIH model: stochastic trend
I AR(1) model for ∆yt
∆yt = φ∆yt 1 + εt
Et ∆yt+j = φj ∆yt
I Saving
j
1
st = yt + r A t 1 ct = ∑j∞=1 Et ∆yt+j
1+r
j φ
substitution yields ∑j∞=1 ∆yt = ∆yt = 1+r φ ∆yt
φ 1+r φ
1+r 1
φ
1+r
so that
φ
st = ∆yt
1+r φ
Implications of RE-PIH model: VAR analysis
I Testable implications considered by Campbell (1987)
I VAR model
xt = Bxt 1 + εt
where
∆yt
xt =
st
I j-period ahead prediction at time t
Et xt+j = Bj xt
so that
j j
1 1
∑j∞=1 Et xt+j = ∑j∞=1 Bj xt
1+r 1+r
1
B B
= I2 xt
1+r 1+r
Implications of RE-PIH model: Granger causality
1
B B
1 0 I2 = 0 1
1+r 1+r
I Testable restrictions 2: st Granger-causes ∆yt so that in VAR
model
xt = Bxt 1 + εt
H0 : β12 = 0 in
β11 β12
B=
β21 β22
should be rejected (saving for a rainy day)
References
I Blanchard, Olivier and Stanley Fischer (1989) Lectures on
Macroeconomics, MIT Press.
I Campbell, John Y. (1987) Does saving anticipate declining
labor income? An alternative test of the permanent income
hypothesis, Econometrica 55, 1249-1273.
I Diamond, Peter (1965) National debt in a neoclassical growth
model, American Economic Review 55, 1126-1150.
I Hall, Robert, (1978) Stochastic implications of the life
cycle-permanent income hypothesis: theory and evidence,
Journal of Political Economy 86, 971-987.
I Romer, David (2011) Advanced Macroeconomics, 4th edition,
McGraw-Hill Education.
I Samuelson, Paul A. (1958) An exact consumption-loan model
of interest with or without the social contrivance of money,
Journal of Political Economy 66, 467-482.
I Uribe, Martín, and Stephanie Schmitt-Grohé (2017) Open
Economy Macroeconomics, Princeton University Press.