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Intertemporal elasticity of substitution and the transitional dynamics and steady state of wealth distribution

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  • Masakazu Emoto

    (Graduate School of Economics, Kobe University)

  • Tamotsu Nakamura

    (Graduate School of Economics, Kobe University)

Abstract

Although the steady state equilibrium is represented by a single point in the capital-consumption plane in the standard Ramsey model, it is by a straight line in a Ramsey model with heterogeneous individuals. Taking advantage of this fact, this paper applies the backward induction method to analyze the transitional dynamics of the Ramsey model with heterogeneous individuals, and examines the role of heterogeneity in intertemporal elasticity of substitution (IES). When no heterogeneity exists in IES across individuals, then the wealth Gini declines as capital accumulates, while the wealth gap expands. In contrast, with heterogeneity, various dynamics of wealth distribution can emerge, including a U-shaped relationship between income and inequality. It is also shown that an inverted U-shaped relationship, i.e., the Kuznets curve can be explained by Stone-Geary preferences, which allow IES to change with wealth.

Suggested Citation

  • Masakazu Emoto & Tamotsu Nakamura, 2021. "Intertemporal elasticity of substitution and the transitional dynamics and steady state of wealth distribution," Discussion Papers 2101, Graduate School of Economics, Kobe University.
    • Handle: RePEc:koe:wpaper:2101
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    File URL: http://www.econ.kobe-u.ac.jp/RePEc/koe/wpaper/2021/2101.pdf
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    References listed on IDEAS

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