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Predetermined Interest Rates in a Analytical RBC model

Author

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  • Patrick Fève

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Alban Moura

    (Banque centrale du Luxembourg - Banque centrale du Luxembourg)

  • Olivier Pierrard

    (Banque centrale du Luxembourg - Banque centrale du Luxembourg)

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.

Suggested Citation

  • Patrick Fève & Alban Moura & Olivier Pierrard, 2018. "Predetermined Interest Rates in a Analytical RBC model," Post-Print hal-05528470, HAL.
    • Handle: RePEc:hal:journl:hal-05528470
    DOI: 10.1016/j.econlet.2018.08.011
    Note: View the original document on HAL open archive server: https://hal.science/hal-05528470v1
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