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Transversality Conditions and Dynamic Economic Behavior

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Author Info
Takashi Kamihigashi (Research Institute for Economics and Business Administration, Kobe University)
Abstract

Transversality conditions are optimality conditions often used along with Euler equations to characterize the optimal paths of dynamic economic models. This article explains the foundations of transversality conditions using a geometric example, a finite horizon problem, and an infinite horizon problem. Their relationships to asset bubbles, hyperdeflations, and no-Ponzi-game conditions are also discussed.

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File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/dp180.pdf
File Format: application/pdf
File Function: First version, 2006
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Publisher Info
Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number 180.

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Length: 8 pages
Date of creation: Jan 2006
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Handle: RePEc:kob:dpaper:180

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  1. Benveniste, L. M. & Scheinkman, J. A., 1982. "Duality theory for dynamic optimization models of economics: The continuous time case," Journal of Economic Theory, Elsevier, vol. 27(1), pages 1-19, June. [Downloadable!] (restricted)
  2. Kamihigashi, Takashi, 2003. "Necessity of transversality conditions for stochastic problems," Journal of Economic Theory, Elsevier, vol. 109(1), pages 140-149, March. [Downloadable!] (restricted)
  3. Montrucchio, Luigi & Privileggi, Fabio, 2001. "On Fragility of Bubbles in Equilibrium Asset Pricing Models of Lucas-Type," Journal of Economic Theory, Elsevier, vol. 101(1), pages 158-188, November. [Downloadable!] (restricted)
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  4. 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)
  5. Kamihigashi, Takashi, 2001. "Necessity of Transversality Conditions for Infinite Horizon Problems," Econometrica, Econometric Society, vol. 69(4), pages 995-1012, July.
  6. Kamihigashi, Takashi, 2005. "Necessity of the transversality condition for stochastic models with bounded or CRRA utility," Journal of Economic Dynamics and Control, Elsevier, vol. 29(8), pages 1313-1329, August. [Downloadable!] (restricted)
  7. Michel, P., 1980. "On the Transversality Condition in Infinite Horizon Optimal Problems," Cahiers de recherche 8024, Universite de Montreal, Departement de sciences economiques.
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  8. Takashi Kamihigashi, 1998. "Uniqueness of asset prices in an exchange economy with unbounded utility," Economic Theory, Springer, vol. 12(1), pages 103-122. [Downloadable!] (restricted)
  9. Obstfeld, Maurice & Rogoff, Kenneth, 1986. "Ruling out divergent speculative bubbles," Journal of Monetary Economics, Elsevier, vol. 17(3), pages 349-362, May. [Downloadable!] (restricted)
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