Optimal Growth with Variable Rate of Time Preference
AbstractIn this paper we develop a continuous time infinite horizon optimal growth model with identical households, where the households' rate of time preference is endogenously determined. However, unlike the existing literature, we assume here that the instantaneous discount rate of the representative household is negatively related to its current consumption. With this assumption, we analyze the long run dynamic behaviour of the economy. We show that contrary to the general belief, a negative relationship between the instantaneous discount rate and the household's current consumption does not necessarily result in instability of the dynamic system. We derive a set of sufficient conditions for stability and instability in this context. We also show the possible existence of a poverty trap such that if an economy starts with a per capita income below a certain critical minimum value, then it optimally chooses a consumption-accumulation path such that it faces economic retrogression over time.
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Bibliographic InfoPaper provided by Centre for Development Economics, Delhi School of Economics in its series Working papers with number 70.
Length: 41 pages
Date of creation: Dec 1999
Date of revision:
Find related papers by JEL classification:
- D90 - Microeconomics - - Intertemporal Choice - - - General
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
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- Das, Mausumi, 2003. "Optimal growth with decreasing marginal impatience," Journal of Economic Dynamics and Control, Elsevier, vol. 27(10), pages 1881-1898, August.
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