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The Ramsey Steady-State Conundrum in Heterogeneous-Agent Economies

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Abstract

This paper makes two fundamental contributions: (i) We prove that the interior Ramsey steady state commonly assumed in the literature may not exist in a standard Aiyagari model-in particular, a steady state with the modified golden rule and a positive capital tax is shown to be feasible but not optimal. (ii) We design a modified, analytically tractable version of the standard Aiyagari model to reveal the necessary and/or sufficient conditions for the existence of a Ramsey steady state. We characterize the basic properties of both interior and non-interior Ramsey steady states and show that researchers may draw fundamentally misleading conclusions about optimal fiscal policy (such as the optimal capital tax rate) from their analysis if an interior Ramsey steady state is incorrectly assumed.

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  • YiLi Chien & Yi Wen, 2022. "The Ramsey Steady-State Conundrum in Heterogeneous-Agent Economies," Working Papers 2022-009, Federal Reserve Bank of St. Louis, revised 29 May 2024.
    • Handle: RePEc:fip:fedlwp:93994
    DOI: 10.20955/wp.2022.009
    Note: Publisher DOI: https://doi.org/10.1016/j.jet.2024.105873
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    Cited by:

    1. YiLi Chien & Yi Wen, 2023. "Optimal Dynamic Tax-Transfer Policies in Heterogeneous-Agents Economies," Working Papers 2023-009, Federal Reserve Bank of St. Louis, revised 27 Jun 2025.

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    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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