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Advanced Macroeconomics

The Ramsey Model

Michal Brzoza-Brzezina/Marcin Kolasa

Warsaw School of Economics

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Introduction

Authors: Frank Ramsey (1928), David Cass (1965) and Tjalling


Koopmans (1965)
Basically the Solow model with endogenous savings - explicit
consumer optimization
Probably the most important model in contemporaneous
macroeconomics, workhorse for many areas, including business cycle
theories

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Basic setup

Closed economy
No government
One homogeneous final good
Price of the final good normalized to 1 in each period (all variables
expressed in real terms)
Two types of agents in the economy:
Firms
Households
Firms and households identical: one can focus on a representative
firm and a representative household, aggregation straightforward

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Firms
Final output produced by competitive firms
Neoclassical production function with Harrod neutral technological
progress
Yt = F (Kt , At Lt ) (1)
Capital and labour inputs rented from households
Technology is available for free and grows at a constant rate g > 0:
At+1 = (1 + g )At
Maximization problem of firms:
max{F (Kt , At Lt ) − Wt Lt − RK ,t Kt }
Lt ,Kt

Firms maximize their profits, taking factor prices as given


(competitive factor markets)
First order conditions:
∂F ∂F
Wt = RK ,t = = f 0 (kt ) (2)
∂Lt ∂Kt
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Households I

Own production factors (capital and labour), so earn income on


renting them to firms
Labour supplied inelastically, grows at a constant rate n > 0:

Lt+1 = (1 + n)Lt

Capital is accumulated from investment It and subject to depreciation:

Kt+1 = (1 − δ)Kt + It (3)

Total income of households can be split between consumption or


savings (equal to investment):

Wt Lt + RK ,t Kt = Ct + St = Ct + It (4)

Make optimal consumption-savings decisions

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Households II

Households maximize the lifetime utility of their members (present


and future):
X∞
U0 = β t u(C̃t )Lt (5)
t=0

where:
Ct
C̃t = Lt - consumption per capita
β - discount factor (0 < β < 1)
u(Ct ) - instantaneous utility from consumption:
1−θ
C̃t
u(C̃t ) = (6)
1−θ
where:
θ>0
If θ = 1 then u(C̃t ) = ln C̃t

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Households III
Remarks:
Literally: household members live forever
Justification: intergenerational transfers, people care about utility of
their offspring
Discounting: households are impatient
Remarks on the utility function:
u(C̃t ) is a constant relative risk aversion function (CRRA):
C̃t u 00 (C̃t )
− =θ
u 0 (C̃t )
u(C̃t ) is a constant intertemporal elasticity of substitution function:
 
˜
∂ ln CC˜1 1
2
−  =
u 0 (C˜1 ) θ
∂ ln u0 (C˜ )
2

CRRA form essential for balanced growth (steady state)


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Households IV
Households’ optimization problem: maximize (5) subject to the
model’s constraints:
Capital law of motion (capital is the only asset held by households),
incorporating income definition and savings-investment equality (4)
Transversality condition:
t
!
Y 1
lim Kt+1 =0 (7)
t→∞
s=1
1 + rs
where: rt = RK ,t − δ = f 0 (kt ) − δ is the market rate of return on
capital (real interest rate)
Interpretation of the transversality condition:
Analog of a terminal condition in a finite horizon
Non-negativity constraint on the terminal (net present) value of assets
held by households (capital)
No-Ponzi game condition: proper lifetime budget constraint on
households
Optimization by households implies (7) holds with equality
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General equilibrium
Market clearing conditions:
Output produced by firms must be equal to households’ total
spending (on consumption and investment):
Yt = Ct + It (8)

Labour supplied by households must be equal to labour input


demanded by firms
Capital supplied by households must be equal to capital input
demanded by firms

Definition of competitive equilibrium


A sequence of {Kt , Yt , Ct , It , Wt , RK ,t }∞
t=0 for a given sequence of
{Lt , At }∞
t=0 and an initial capital stock K0 , such that (i) the representative
household maximizes its utility taking the time path of factor prices
{Wt , RK ,t }∞
t=0 as given; (ii) firms maximize profits taking the time path of
factor prices as given; (iii) factor prices are such that all markets clear.
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Households’ optimization problem

Lifetime utility rewritten:


∞ 1−θ
t C̃t
X
U0 = β Lt =
1−θ
t=0
∞ 1−θ
X C̃t
= L0 β̃ t (9)
1−θ
t=0

where:
β̃ = β(1 + n) β(1 + g )1−θ (1 + n) < 1
the last inequality is assumed and ensures that utility is bounded

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Households’ optimization problem II

Capital accumulation rewritten in per capita terms (using (4)):

1−δ 1
K̃t+1 = K̃t + (Wt + RK ,t K̃t − C̃t ) (10)
1+n 1+n
Capital accumulation rewritten in intensive form (using (4) and
defining wt = W
At ):
t

1−δ 1
kt+1 = kt + (wt + RK ,t kt − ct ) (11)
(1 + g )(1 + n) (1 + g )(1 + n)

Transversality condition rewritten in intensive form:


t
!
Y (1 + n)(1 + g )
lim kt+1 =0 (12)
t→∞ 1 + rs
s=1

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Lagrange function and FOCs

Lagrange function (normalizing L0 ):


∞ !
C̃t1−θ

X (1 − δ)K̃t + Wt + RK ,t K̃t − C̃t −
LL = β̃ t + λt
1−θ −(1 + n)K̃t+1
t=0

First order conditions (FOCs):

∂LL
= 0 =⇒ C̃t−θ = λt (13)
∂ C̃t
∂LL
= 0 =⇒ β̃λt+1 (1 − δ + RK ,t+1 )) = (1 + n)λt (14)
∂ K̃t+1

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Euler equation I

Equations (13) and (14) imply:



C̃t+1 RK ,t+1 + 1 − δ
= β̃ (15)
C̃t (1 + n)

Using the definition of β̃ and rewriting in intensive form:


 θ
ct+1 RK ,t+1 + 1 − δ
=β (16)
ct (1 + g )θ

For consumption per capita, using also the definition of the interest
rate rt : !θ 
ct+1 At+1 θ

C̃t+1
= = β (1 + rt+1 ) (17)
C̃t ct At

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Euler equation II

Interpretation of the Euler equation (17):


For θ > 0: C̃t+1 > C̃t ⇐⇒ 1 + rt+1 > β −1
Interpretation: For (per capita) consumption to grow the (market)
interest rate must exceed households’ rate of time preference
Interpretation: It is optimal for households to postpone consumption
(i.e. save in the current period and consume more in the next period)
iff the related utility loss is more than offset by the rate of return on
savings
Role of θ:
The higher θ the less responsive consumption to changes in the interest
rate
In other words: The higher θ the stronger the consumption smoothing
motive (the lower intertemporal substitution)

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 14 / 47


Equilibrium dynamics in intensive form - summary

The equilibrium dynamics of the model at any time t can be


characterized by 3 equations: (16), (11) and (12). They are (after
some rewriting and using (4) and (8) in intensive form):

f 0 (kt+1 ) + 1 − δ

ct+1
=β (18)
ct (1 + g )θ

kt+1 1−δ 1 f (kt ) − ct


= + (19)
kt (1 + g )(1 + n) (1 + g )(1 + n) kt
t
!
Y (1 + n)(1 + g )
lim kt+1 =0 (20)
t→∞ f 0 (kt+1 ) + 1 − δ
s=1

At t = 0 capital is fixed. For given initial k0 and c0 , equations (18)


and (19) describe the future evolution of these variables: kt and ct .
The transversality condition (20) pins down the initial level of
consumption c0 .
Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 15 / 47
Steady state equilibrium I

In the steady state equilibrium kt and ct must be constant.


Using (18) and (19), the long-run solution to the Ramsey model:

(1 + g )θ
f 0 (k ∗ ) = −1+δ (21)
β

c ∗ = f (k ∗ ) − (n + g + δ + ng )k ∗ (22)

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 16 / 47


Steady state equilibrium II

Plotting (21) and (22) in the (k, c) space:

ct ct+1=ct

c*

kt+1=kt

k* kG kt

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Modified golden rule I

How do we know that k ∗ < kG ?


From (22):
f 0 (kG ) = n + g + δ + ng

The transversality condition (20) written in the steady-state:


 t
(1 + n)(1 + g )
lim k ∗ =0
t→∞ f 0 (k ∗ ) + 1 − δ

This implies:
f 0 (k ∗ ) > n + g + δ + ng
Since f 00 (k) < 0 for any k > 0

f 0 (k ∗ ) > f 0 (kG ) =⇒ k ∗ < kG (23)

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 18 / 47


Modified golden rule II

Equivalently, we can show that the steady-state savings rate s ∗ falls


short of the savings rate consistent with the golden rule:
From (22), the steady-state savings rate is:

c∗ k∗
s∗ = 1 − = (n + g + δ + ng )
f (k ∗ ) f (k ∗ )

Using (23):
k∗
s ∗ < f 0 (k ∗ ) = α(k ∗ )
f (k ∗ )
Intuitive explanation: households are impatient (β < 1) and smooth
consumption (θ > 0, relevant if g > 0).

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 19 / 47


The role of the discount factor

Higher β implies more patient consumers


From (21): if β goes up, f 0 (k ∗ ) goes down, which means that k ∗
goes up
The ct+1 = ct locus on the (k, c) chart shifts right
Steady-state consumption goes up
Intuition: if households are more patient, they save more, which
brings them closer to the standard golden rule

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Phase diagram
From (18): k ≶ k ∗ =⇒ ∆c ≷ 0
From (19): c ≶ f (k) − (n + g + δ + ng )k =⇒ ∆k ≷ 0

ct ct+1=ct

c*

kt+1=kt

k* kt
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Saddle path (stable arm)
Transversality condition (20) pins down the inital level of c0 for any
initial k0 , so that the system converges to the steady-state:

ct ct+1=ct

c*

kt+1=kt
c0

k0 k* kt
Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 22 / 47
Uniqueness of equilibrium

How do we know that the saddle path is a unique equilibrium?


If the initial level of consumption were below c0 :
capital would eventually reach its maximal level k̄ > kG
this implies:
f 0 (k̄) < f 0 (kG ) = n + g + δ + ng
which violates the transversality condition (20) since:
 t
(1 + n)(1 + g )
lim k̄ =∞
t→∞ f 0 (k̄) + 1 − δ

informally (but more intuitively): at the end of their planning horizon,


households would hold very valuable assets, which cannot be optimal
If the initial level of consumption were above c0 :
capital would eventually reach 0 but consumption would stay positive,
which is clearly not feasible

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 23 / 47


Speed of convergence

Compared to the Solow model, the speed of convergence in the


Ramsey model depends additionally on the behaviour of the savings
rate along the transition path
For very small time intervals, the following implications hold (see
Barro and Sala-i-Martin, 2004, ch. 2.6.4):
1
θ < s ∗ =⇒ st − s ∗ depends positively on kt − k ∗
1
θ = s ∗ =⇒ st = s ∗
1
θ > s ∗ =⇒ st − s ∗ depends negatively on kt − k ∗
Intuition (suppose the economy starts from k0 < k ∗ , so c0 < c ∗ ):
if households care much about consumption smoothing (θ is high),
they wll try to shift consumption from the future to the present
if households care little about consumption smoothing (θ is low), they
will try to postpone consumption to reach steady-state sooner
For standard parameter values 1θ > s ∗ , so the Ramsey model predicts
relatively fast pace of convergence
Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 24 / 47
Wealth and consumption

Consider the lifetime budget constraint of the household

∞ ∞
X Ct X W t Lt
C0 + = (1 + r0 )K0 + W0 L0 + ≡ Ωt
Rt Rt
t=1 t=1

where Ωt is lifetime wealth. Substitute recursively from Euler

Ct+1 1
= (β (1 + rt )) θ (1 + n)
Ct

1 1
(β (1 + r1 )) θ (1 + n) β 2 (1 + r1 ) (1 + r2 ) θ (1 + n)2
C0 +C0 +C0 +. . . = Ωt
R1 R2

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 25 / 47


Wealth and consumption cont’d

so that

" ∞ 1 #−1
X (β t Rt ) θ (1 + n)t
C0 = Ωt 1+
Rt
t=1

For log utility this boils down to

C0 = [1 − β (1 + n)] Ωt

So current consumption depends on lifetime wealth. Current income


has a small impact on current consumption!

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 26 / 47


Efficiency of equilibrium

A very important question in economics: are markets efficient?


What does it mean? If markets are efficient the equilibrium allocation
maximizes households welfare.
Then government intervention is pointless (see Adam Smith’s invisible
hand)
But we know many situations where markest fail. E.g.:
externalities
imperfect information
principal-agent problem
How about the Ramsey model?

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 27 / 47


Social planer’s problem

Imagine a social planer - allocates resources and wishes to maximize


household welfare
Constrained by technology and available resources
For simplicity consider a model without labor or technology growth


X
max U0 = β t u(ct ) (24)
ct ,kt+1 ,yt
t=0

subject to
yt = f (kt )
and

ct + kt+1 = yt + (1 − δ)kt

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 28 / 47


Lagrangean and FOC


X ∞
X
t
L= β u(ct ) − λt [ct + kt+1 − f (kt ) − (1 − δ)kt ] (25)
t=0 t=0

FOC:

ct : β t uc,t = λt

kt+1 : −λt + λt+1 f 0 (kt+1 ) + 1 − δ = 0


 

TVC (imposed) : lim λt kt+1 = 0


t→∞

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 29 / 47


Optimal allocation

The optimal alocation is given by

uc,t
= f 0 (kt+1 ) + 1 − δ
βuc,t+1

TVC : lim β t uc,t kt+1 = 0


t→∞

yt = f (kt )

ct + kt+1 = yt − (1 − δ)kt

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 30 / 47


Comparison to decentralized (competitive) equilibrium

The competitive equilibrium is given by (16), (11) and (12), which


after ignoring labor and population growth become:

uc,t
= β (RK ,t+1 + 1 − δ)
uc,t+1

kt+1 = (1 − δ) kt + (wt + RK ,t kt − ct )

t
!
Y 1
lim kt+1 =0
t→∞ 1 + rs
s=1

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 31 / 47


Competitive equilibrium cont’d
Use zero profit condition:

kt+1 = (1 − δ) kt + yt − ct

Note that

uc,t+1
= β(1 + rt+1 )
uc,t

so that
t
Y 1 βuc,1 βuc,2 βuc,t β t uc,t
= ··· =
1 + rs uc,0 uc,1 uc,t−1 uc,0
s=1
Hence TVC condition is equivalent to

lim β t uc,t kt+1 = 0



t→∞

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 32 / 47


Welfare theorems

Hence, social planner’s and competitive allocations are equal. Ramsey


economy reflects two fundamental welfare theorems.

1 First welfare theorem: every competitive equilibrium is efficient.


2 Second welfare theorem: any efficient allocation can be supported as
a competitive equilibrium (possibly with lump-sum transfers).

First states that resources are not wasted in a competitve economy


(Adam Smith would like it).
Second gives the equivalence beween an efficient and competitive
allocation and thus, the possibility to solve the (simpler) planners
problem.

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 33 / 47


The government

In modern economies governments are big players


G
Y is 40-50% (once all government expenditure is accounted for)
Some problems worth analysing:
difference/ similarity between tax and debt financing of gov.
expenditure
reaction of economy to government shocks (spending, taxes)

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 34 / 47


Ricardian equivalence

In the Ramsey model Ricardian equivalence holds:


Government plans sustainable - initial debt plus net present value of
expenditures equals net present value of revenues

∞ ∞
X Tt X Gt
T0 + = (1 + r0 )B0 + G0 +
Rt Rt
t=1 t=1

where
t
Y
Rt ≡ (1 + ri )
i=1

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 35 / 47


Ricardian equivalence cont’d

Household lifetime budget (with government)

∞ ∞ ∞
X Ct X Wt Lt X Tt
C0 + = (1 + r0 )K0 + (1 + r0 )B0 + W0 L0 + − T0 −
Rt Rt Rt
t=1 t=1 t=1

P∞ Tt
Substitute from government budget for t=1 Rt

∞ ∞ ∞
X Ct X Wt Lt X Gt
C0 + = (1 + r0 )K0 + W0 L0 + − G0 −
Rt Rt Rt
t=1 t=1 t=1

What matters for the household is the present value of expenditures


Financing expenditures with lump-sum taxes equivalent to financing
expenditures with debt
Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 36 / 47
Ricardian equivalence in practice

Empirical research shows that Ricardian equivalence holds partly


Why? Some explanations can be given within our modeling
framework.
finite horizon of households
different interest rates
credit constrained households
distortionary taxes
Good to know the theoretical benchmark where Ricardian equivalence
holds
For instance to be able to construct models where gov. deficits have
macro effects

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 37 / 47


Distortionary taxation

The government is assumed to run a balanced budget each period:

Gt = Vt +τw Wt Lt +τk (RK ,t − δ) Kt +τc Ct +τi It +τf (Yt − Wt Lt − δKt )


(26)
where:
Gt - government purchases (exogenous)
τw , τk , τc , τi , τf - proportional tax rates on wage income, capital
income, consumption, investment and firms’ taxable profits,
respectively (all exogenous)
Vt - lump-sum taxes (net of lump-sum transfers) from households,
adjusted so that the balanced budget constraint (26) holds

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 38 / 47


Modified firms’ problem

Maximization problem of firms:

max{F (Kt , At Lt ) − Wt Lt − RK ,t Kt − τf (F (Kt , At Lt ) − Wt Lt − δKt )}


Lt ,Kt

First order conditions (using definition rt = RK ,t − δ):

∂F rt ∂F
Wt = +δ = = f 0 (kt )
∂Lt 1 − τf ∂Kt
Firms are competitive so earn zero profits:

Yt = Wt Lt + RK ,t Kt + τf (Yt − Wt Lt − δKt ) (27)

Market clearing on the product market:

Yt = Ct + It + Gt (28)

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 39 / 47


Modified households’ problem

We assume that government actions do not affect utility directly, so


households’ lifetime utility is still given by (5)
Households’ budget constraint (4) becomes:

Wt Lt +RK ,t Kt −τw Wt Lt −τk (RK ,t − δ) Kt −Vt = (1+τc )Ct +(1+τi )It


(29)
Note that, by (27), households’ factor income is no longer equal to
output
Modified transversality condition:
t
!
Y 1
lim Kt+1 =0 (30)
t→∞ 1 + (1 − τk )rs
s=1

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 40 / 47


Modified households’ optimization problem

Lifetime utility (identical to (9)):



X C̃t1−θ
U0 = L0 β̃ t (31)
1−θ
t=0

Capital accumulation (substituting for investment from (29)):


1−δ 1
K̃t+1 = K̃t +
1+g (1 + g )(1 + τi )
 
(1 − τw )Wt + (1 − τk )RK ,t K̃t + τk δ K̃t
(32)
−(1 + τc )C̃t − Ṽt

Transversality condition:
t
!
Y 1+n
lim K̃t+1 =0 (33)
t→∞ 1 + (1 − τk )rs
s=1

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 41 / 47


Equilibrium dynamics
The equilibrium dynamics of the model at any time t is given by the
following equations:
Euler equation (maximizing (31), subject to (32) and using firms’
FOC):

ct+1 θ 1 + τi (1 − δ) + (1 − τk )(1 − τf )(f 0 (kt+1 ) − δ)


 
=β (34)
ct (1 + g )θ (1 + τi )

Capital accumulation equation (32) (merged with government budget


constraint (26) and firms’ zero profit condition (27), with gt = AGt Lt t ):
kt+1 1−δ 1 f (kt ) − ct − gt
= + (35)
kt (1 + g )(1 + n) (1 + g )(1 + n) kt
Transversality condition (33):
t
!
Y (1 + n)(1 + g )
lim kt+1 0 (k
=0 (36)
t→∞
s=1
f t+1 ) + 1 − δ

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 42 / 47


Simplified variant - only capital tax

Euler equation becomes:



1 + (1 − τk )(f 0 (kt+1 ) − δ)

ct+1

ct (1 + g )θ

Capital accumulation equation:

kt+1 1−δ 1 f (kt ) − ct − gt


= +
kt (1 + g )(1 + n) (1 + g )(1 + n) kt

Steady state:

(1 + g )θ − β
f 0 (k ∗ ) = +δ
β(1 − τk )
c ∗ = f (k ∗ ) − (n + g + δ + ng )k ∗ − g ∗

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 43 / 47


Simplified variant - simulate shocks

Permanent increase in government expenditure (financed with


lump-sum taxes)
Temporary increase in government expenditure (financed with
lump-sum taxes)
Permanent increase in capital tax

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 44 / 47


Conclusions from model with government

In the Ramsey model:


Ricardian equivalence holds as long as taxes are nondistortionary
Taxes on capital, investment and firm profits are distortionary (change
the equilibrium allocation)
Taxes on consumption and labor income are nondistortionary (but only
as long as labor supply is exogeneous)
Government expenditure crowds out private consumption one-to-one
but does not affect capital or output (if financed by nondistortionary
taxes)

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 45 / 47


Some simulations with the Ramsey model

Several interesting numerical simulations can be done with the


Ramsey model
find initial consumption for given k0 that fulfils the equilibrium
conditions
simulate convergence from c0 , k0 to steady state
simulate a change (temporary or permanent) of:
rate of time preference
government expenditure
capital tax

Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 46 / 47


Main implications of the Ramsey model

As in the Solow model, long-run growth (of output per capita)


possible only with technological progress (exogenous in both models)
We should observe conditional, but not necessarily unconditional,
convergence (in line with the data)
Shows several important (though ratehr benchmark) features
Ricardian equivalence
Key role of permanent income (lifetime wealth) in driving consuption
Compared to the Solow model:
Explicit optimality criterion - households’ utility
If there is no distortionary taxation (i.e. if there is no government or all
taxes are lump-sum), allocations are Pareto optimal: decentralized
equilibrium coincides with allocations dictated by a benevolent social
planer (markets are competitive and complete, so the first welfare
theorem applies)
Savings rate endogenous and in the long-run always lower than implied
by the golden rule
Michal Brzoza-Brzezina/Marcin Kolasa (WSE) Ad. Macro - Ramsey model 47 / 47