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Predetermined interest rates in an analytical RBC model

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  • Fève, Patrick
  • Moura, Alban
  • Pierrard, Olivier

Abstract

We solve a version of the analytical Real Business Cycle (RBC) model with a predetermined rate of return on household saving. The solution differs from that of the benchmark RBC model along two dimensions: (i) Policy functions depend on the variance of the technology shock. (ii) There is a suboptimal pattern of excess saving. We discuss the economic intuition underlying these properties. We also demonstrate that unconditional welfare can be higher in the suboptimal model with predetermined interest rates, providing a clear illustration of the pitfall with unconditional welfare comparisons.

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  • Fève, Patrick & Moura, Alban & Pierrard, Olivier, 2018. "Predetermined interest rates in an analytical RBC model," Economics Letters, Elsevier, vol. 172(C), pages 12-15.
    • Handle: RePEc:eee:ecolet:v:172:y:2018:i:c:p:12-15
    DOI: 10.1016/j.econlet.2018.08.011
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    1. Fève, Patrick & Moura, Alban & Pierrard, Olivier, 2018. "Predetermined interest rates in an analytical RBC model," Economics Letters, Elsevier, vol. 172(C), pages 12-15.

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    More about this item

    Keywords

    RBC model; Predetermined interest rates; Over-saving; Conditional and unconditional welfare;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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