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The Ramsey Model

In: ADVANCED MACROECONOMICS An Introduction for Undergraduates

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  • Angus C. Chu

Abstract

In this chapter, we continue our analysis of economic growth by developing the Ramsey model, which can be viewed as a generalisation of the Solow growth model. The Solow model assumes an exogenous saving rate, whereas the Ramsey model features a representative household which chooses the saving rate optimally. As we saw in the Solow model, although the saving rate does not affect the long-run growth rate, it affects the levels of capital and output. Therefore, the Ramsey model allows us to explore the question on why the saving rate differs across countries, which explains some of the variation in the level of income across countries. In summary, we find that the saving rate is determined by the household’s discount rate, the degree of capital intensity in production and the depreciation rate of capital but independent of the level of technology. Aside from the endogenous saving rate, the rest of the Ramsey model is the same as the Solow model.

Suggested Citation

  • Angus C. Chu, 2020. "The Ramsey Model," World Scientific Book Chapters, in: ADVANCED MACROECONOMICS An Introduction for Undergraduates, chapter 10, pages 79-85, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9781786349132_0010
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    Keywords

    Macroeconomics; Dynamic General Equilibrium; Economic Growth; Endogenous Technological Change; Monetary Policy; Fiscal Policy; Business Cycles; Unemployment; Market Failure; The Neoclassical Growth Model; The Romer Model; The Schumpeterian Growth Model; The Solow Growth Model; The Ramsey Model; The New Keynesian Model;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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