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A Simple Monetary Growth Model with Variable Rates of Time Preference

  • Tom Kompas
  • Omar Abdel-Razeq

This paper constructs a simple optimal monetary growth model in which an endogenous and variable rate of time preference provides a rational foundation for a Tobin-effect in a system where otherwise strong neoclassical assumptions (e.g., perfect foresight, an infinite planning horizon, and continuous marketclearing) are maintained. Changes in the proportional rate of growth of the nominal money supply affect both the rate of time preference (ñ) and the equilibrium capital—labour ratio. The impact effect of a fall in ñ (less impatience), and the induced capital accumulation that goes with it, drives the result. Proper transformation rules for two-state variable control problems and curvature and simulation results for the rate of time preference function are also established. The latter in particular provides a reasonable and easily understood foundation for simple systems in which the rate of time preference depends on an index of future consumption, and provides a counter-argument to well-known criticisms (e.g., Blanchard and Fischer (1989) and Barro and Sali-i-Martin (1995)) of Epstein—Uzawa rate of time preference functions. All results are obtained in an analytically simple way, using standard techniques.

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File URL: https://crawford.anu.edu.au/degrees/idec/working_papers/IDEC01-10.pdf
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Paper provided by International and Development Economics in its series International and Development Economics Working Papers with number idec01-10.

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Length: 19 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:idc:wpaper:idec01-10
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  1. Epstein, Larry G & Hynes, J Allan, 1983. "The Rate of Time Preference and Dynamic Economic Analysis," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 611-35, August.
  2. 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.
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  16. Maurice Obstfeld, 1981. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," NBER Working Papers 0686, National Bureau of Economic Research, Inc.
  17. Johanna Francis & Tom Kompas, 2001. "Uzawa's Transformation and Optimal Control Problems with Variable Rates of Time Preference," International and Development Economics Working Papers idec01-12, International and Development Economics.
  18. Maurice Obstfeld, 1989. "Intertemporal Dependence, Impatience, and Dynamics," NBER Working Papers 3028, National Bureau of Economic Research, Inc.
  19. Begg, David K H, 1980. "Rational Expectations and the Non-neutrality of Systematic Monetary Policy," Review of Economic Studies, Wiley Blackwell, vol. 47(2), pages 293-303, January.
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  22. Fischer, Stanley, 1979. "Anticipations and the Nonneutrality of Money," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 225-52, April.
  23. Kompas, Tom & Spotton, Brenda, 1989. "A note on rational speculative bubbles," Economics Letters, Elsevier, vol. 30(4), pages 327-331, October.
  24. Epstein, Larry G, 1987. "The Global Stability of Efficient Intertemporal Allocations," Econometrica, Econometric Society, vol. 55(2), pages 329-55, March.
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  26. Becker, Robert A, 1980. "On the Long-Run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households," The Quarterly Journal of Economics, MIT Press, vol. 95(2), pages 375-82, September.
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  28. Fischer, Stanley, 1979. "Capital Accumulation on the Transition Path in a Monetary Optimizing Model," Econometrica, Econometric Society, vol. 47(6), pages 1433-39, November.
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