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A Simple Monetary Growth Model with Variable Rates of Time Preference

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Author Info
Tom Kompas
Omar Abdel-Razeq

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Abstract

This paper constructs a simple optimal monetary growth model in which an endogenous and variable rate of time preference provides a rational foundation for a Tobin-effect in a system where otherwise strong neoclassical assumptions (e.g., perfect foresight, an infinite planning horizon, and continuous marketclearing) are maintained. Changes in the proportional rate of growth of the nominal money supply affect both the rate of time preference (ñ) and the equilibrium capital—labour ratio. The impact effect of a fall in ñ (less impatience), and the induced capital accumulation that goes with it, drives the result. Proper transformation rules for two-state variable control problems and curvature and simulation results for the rate of time preference function are also established. The latter in particular provides a reasonable and easily understood foundation for simple systems in which the rate of time preference depends on an index of future consumption, and provides a counter-argument to well-known criticisms (e.g., Blanchard and Fischer (1989) and Barro and Sali-i-Martin (1995)) of Epstein—Uzawa rate of time preference functions. All results are obtained in an analytically simple way, using standard techniques.

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Paper provided by International and Development Economics in its series International and Development Economics Working Papers with number idec01-10.

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Length: 19 pages
Date of creation: 2001
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Handle: RePEc:idc:wpaper:idec01-10

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Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
O42 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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  1. Shi, Shouyong & Epstein, Larry G, 1993. "Habits and Time Preference," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 61-84, February. [Downloadable!] (restricted)
  2. Calvo, Guillermo A, 1979. "On Models of Money and Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(1), pages 83-103, February. [Downloadable!] (restricted)
  3. Francis, J. & Kompas, T., 1998. "Uzawa's Transformation and Optimal Control Problems With Variable Rates of Time Preference," Papers 354, Australian National University - Department of Economics.
    Other versions:
  4. Obstfeld, Maurice, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, MIT Press, vol. 97(2), pages 251-70, May. [Downloadable!] (restricted)
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  5. Obstfeld, Maurice, 1981. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1142-61, December. [Downloadable!] (restricted)
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  6. Kompas, Tom & Spotton, Brenda, 1989. "A note on rational speculative bubbles," Economics Letters, Elsevier, vol. 30(4), pages 327-331, October. [Downloadable!] (restricted)
  7. Obstfeld, Maurice, 1981. "Capital Mobility and Devaluation in an Optimizing Model with Rational Expectations," American Economic Review, American Economic Association, vol. 71(2), pages 217-21, May. [Downloadable!] (restricted)
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  8. Epstein, Larry G., 1987. "A simple dynamic general equilibrium model," Journal of Economic Theory, Elsevier, vol. 41(1), pages 68-95, February. [Downloadable!] (restricted)
  9. Miguel Sidrauski, 1967. "Inflation and Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 75, pages 796. [Downloadable!] (restricted)
  10. Brock, William A, 1974. "Money and Growth: The Case of Long Run Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(3), pages 750-77, October. [Downloadable!] (restricted)
  11. Fischer, Stanley, 1979. "Capital Accumulation on the Transition Path in a Monetary Optimizing Model," Econometrica, Econometric Society, vol. 47(6), pages 1433-39, November. [Downloadable!] (restricted)
  12. Begg, David K H, 1980. "Rational Expectations and the Non-neutrality of Systematic Monetary Policy," Review of Economic Studies, Blackwell Publishing, vol. 47(2), pages 293-303, January. [Downloadable!] (restricted)
  13. Ryder, Harl E, Jr & Heal, Geoffrey M, 1973. "Optimum Growth with Intertemporally Dependent Preferences," Review of Economic Studies, Blackwell Publishing, vol. 40(1), pages 1-33, January. [Downloadable!] (restricted)
  14. Sargent, Thomas J & Wallace, Neil, 1973. "The Stability of Models of Money and Growth with Perfect Foresight," Econometrica, Econometric Society, vol. 41(6), pages 1043-48, November. [Downloadable!] (restricted)
  15. repec:fth:simfra:93-03 is not listed on IDEAS
  16. Gomme, P., 1993. "Money and Growth Revisited : Measuring the Costs of Inflation in an Endogenous Growth Model," Discussion Papers dp93-03, Department of Economics, Simon Fraser University.
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  17. Fischer, Stanley, 1979. "Anticipations and the Nonneutrality of Money," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 225-52, April. [Downloadable!] (restricted)
  18. Robert J. Barro & Paul Romer, 1993. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr93-1.
    Other versions:
    • Robert J. Barro & Paul M. Romer, 1991. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr91-1.
  19. Obstfeld, Maurice, 1990. "Intertemporal dependence, impatience, and dynamics," Journal of Monetary Economics, Elsevier, vol. 26(1), pages 45-75, August. [Downloadable!] (restricted)
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  20. repec:fth:harver:1504 is not listed on IDEAS
  21. Epstein, Larry G, 1987. "The Global Stability of Efficient Intertemporal Allocations," Econometrica, Econometric Society, vol. 55(2), pages 329-55, March. [Downloadable!] (restricted)
  22. Epstein, Larry G & Hynes, J Allan, 1983. "The Rate of Time Preference and Dynamic Economic Analysis," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 611-35, August. [Downloadable!] (restricted)
  23. Epstein, Larry G., 1983. "Stationary cardinal utility and optimal growth under uncertainty," Journal of Economic Theory, Elsevier, vol. 31(1), pages 133-152, October. [Downloadable!] (restricted)
  24. Becker, Robert A, 1980. "On the Long-Run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households," The Quarterly Journal of Economics, MIT Press, vol. 95(2), pages 375-82, September. [Downloadable!] (restricted)
  25. Engel, Charles & Kletzer, Kenneth, 1989. "Saving and Investment in an Open Economy with Non-traded Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 735-52, November. [Downloadable!] (restricted)
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  26. De Gregorio, Jose, 1993. "Inflation, taxation, and long-run growth," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 271-298, June. [Downloadable!] (restricted)
  27. Buckholtz, P. & Hartwick, J., 1989. "Zero time preference with discounting," Economics Letters, Elsevier, vol. 29(1), pages 1-6. [Downloadable!] (restricted)
  28. Uzawa, H, 1969. "Time Preference and the Penrose Effect in a Two-Class Model of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 77(4), pages 628-52, Part II, . [Downloadable!] (restricted)
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