Takashi Kamihigashi (Research Institute for Economics and Business Administration, Kobe University)
Abstract
This paper shows that the standard transversality condition (STVC) is necessary for optimality for stochastic models with constant-relative-risk-aversion (CRRA) utility under general conditions. We consider an infinite-horizon stochastic maximization problem that takes a general form of multi-sector growth model with a single consumption good and CRRA utility. We establish two results. The first result is that the STVC is necessary in the case of logarithmic utility. The second result is that the STVC is necessary in the case of non-logarithmic CRRA utility as long as lifetime utility is finite at the optimum. These results apply to various stochastic growth models, including real business cycle (RBC) models with endogenous labor supply. Our results make it clear that there is practically no issue about necessity of the STVC for stochastic models with CRRA utility.
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Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number
137.
Find related papers by JEL classification: C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis D90 - Microeconomics - - Intertemporal Choice and Growth - - - General G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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King, Robert G. & Rebelo, Sergio T., 1999.
"Resuscitating real business cycles,"
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007
Elsevier.
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