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Propensity to Consume and the Optimality of Ramsey-Euler Policies

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  • Tapan Mitra

    (Cornell University)

  • Santanu Roy

    (Southern Methodist University)

Abstract

In a general one-sector optimal stochastic growth model where the production technology may be globally unproductive or may allow for unbounded growth, a policy function satisfying the Ramsey-Euler condition may not be optimal even if consumption and investment are continuous and increasing in output. We outline verifiable sufficient conditions for optimality that do not require checking the transversality condition. In addition to continuity (or monotonicity), these conditions impose lower bounds on the propensity to consume. In the case of production functions with multiplicative shocks, the consumption propensity needs to be bounded away from zero; a similar condition is sufficient for more general production functions if the utility function belongs to a restricted class.

Suggested Citation

  • Tapan Mitra & Santanu Roy, 2020. "Propensity to Consume and the Optimality of Ramsey-Euler Policies," Departmental Working Papers 2007, Southern Methodist University, Department of Economics.
    • Handle: RePEc:smu:ecowpa:2007
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    More about this item

    Keywords

    Stochastic growth; optimal economic growth; uncertainty; unbounded growth; unproductive technology; transversality condition; optimality conditions; Euler equation.;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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