Question

under what circumstances will the ramsey "optimal growth" discount rate be negative? Explain answer in terms of the components of the Ramsey discount formula

Answer 1

Ramsey model lrefered consumption and investment optimally to maximize the utility. Ramsey model deals with the few criteria that plays a major role. They are discussed as follows:-

1. No population.

2.No technology growth.

3.Closed economy.

Now the ramsey "optimal growth" discount rate will be negative when:-

1.In his model you will never see long term growth.

2. His model never deal with fundamental growth instead he focuses only on the Solow model.

3. Per capita variables converge to stationary equilibrium.

4.Capital is over valued in his model.

5. He covers only the exogeneous factors in his model to deal with the optimal growth.

The Ramsey discount formula:-

The rate at which the discount is estimated for future in year t.

If it is expected the utility of future generation a value of zero is estimated.

The growth rate of per capita income is assumed through the relation between present and time t.

Economy of Ramsey model works on the assumption that the choice of the saving and consumption level to Maximize the net present value of utility in time t.

R is the real rate of capital.

p is the pure rate or the discount rate

n is the elasticity

g is the average growth rate