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Publiez vos documents !The Ramsey-Cass-Koopmans model
Résumé de l'étude de cas
The Ramsey-Cass-Koopmans model is an economic model resembling the Solow model. The purpose of this paper is to outline the model with government, and assess the effects of government spending being tax or bond financed. We will see a result stating that it does not matter whether government spending is tax or bond financed. The Ramsey model is a micro-founded model - where the dynamics of economic aggregates are determined by decisions at a microeconomic level. The growth rates of population and technology are constant, and capital stock evolves through the interaction between households and firms in a competitive market. Savings rate therefore, is no longer exogenous and does not have to be constant. Before outlining the model however, the assumptions used need to be outlined for both firms and households. Firstly, we assume there are a large number of identical firms, all trying to maximize profit. Each firm has access to the production function Y = F(K, AL), where K is capital and AL is effective labor. The firms operate in a competitive factor market, i.e. they hire workers and rent capital in a perfectly competitive market, and sell output in a perfectly competitive market. Technology (A) is given, and this grows at rate g. Also, because the firms are owned by households, any profits a firm gains are accrued in a household.
Sommaire de l'étude de cas
- Introduction to Ramsey-Cass-Koopmans model
- Theoretical section
- Assumptions of firms
- Assumptions of households
- Outline of the Ramsey model
- Dynamics of consumption
- Dynamics of capital
- Ramsey model with government
- Applied section
- Wars and real interest rates
- Bond vs tax dynamics
- Conclusion
- References
Extraits de l'étude de cas
[...] For example, traditional economic models state that a shift from tax to bond finance increases consumption, and so the United State's huge budget deficits will be increasing consumption and hence reducing capital accumulation and growth. If Ricardian equivalence holds however, this is not the case, and cutting taxes will make no difference. References Aiyagari, S. and Gertler, M Backing of Government Bonds and Monetarism,? Journal of Monetary Economics (July): 19-44. Barro, R. J Government Bonds Net Wealth?? Journal of Political Economy 82 (November/December): 1095-1117. Barro, R. [...]
[...] Also, more realistically, bonds are usually paid back by individuals who were alive at the time of issue. Lifetimes are long so an increase in wealth due to a bond issue only actually represents a small impact on consumption. It seems that even with the entry of new households, Ricardian equivalence is still a good approximation. Ricardian equivalence is closely related to the permanent-income hypothesis, and it is argued that if the permanent-income hypothesis fails, then so will the Ricardian equivalence result. [...]
[...] Another major factor behind the failure of the permanent- income hypothesis is liquidity constraint. The government issues bonds to a household, which has to be paid back in the future; in effect, the government is borrowing on the household's behalf. Now, if we suppose that a household faces a higher interest rate for borrowing than the government, we would see that the household would borrow at the government interest rate and increase consumption. A bond issue also has little effect on the amount an individual can borrow due to the fact taxes are non lump sum. [...]
[...] The Ramsey-Cass-Koopmans model ?Outline the Ramsey model with Government and assess the effects of government spending. Does it matter whether this spending is tax or bond financed?? Introduction The Ramsey-Cass-Koopmans model is an economic model resembling the Solow model. The purpose of this paper is to outline the model with government, and assess the effects of government spending being tax or bond financed. We will see a result stating that it does not matter whether government spending is tax or bond financed. [...]
[...] The economy moves straight to a new equilibrium without any overshooting. We have just seen the effects of permanent increases in government consumption, and now we can look at what happens when the government only increases consumption temporarily. In the long run, government purchases will return to the initial level, and hence the saddle path is drawn on the initial equilibrium. As soon as the policy is announced (i.e. an increase in government purchases), the system jumps onto the integral curve that leads to the saddle path, which in turn leads back to the long run equilibrium. [...]
Descriptif de l'étude de cas
- Date de publication
- 2009-03-08
- Date de mise à jour
- 2015-02-02
- Langue
- anglais
- Format
- Word
- Type
- étude de cas
- Nombre de pages
- 9 pages
- Niveau
- expert
- Téléchargé
- 4 fois
- Validé par
- le comité de lecture
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