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Problem Set 2: RCK Model: Due: October 24

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166 views2 pages

Problem Set 2: RCK Model: Due: October 24

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jinshengliao060
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Problem Set 2: RCK Model

Due: October 24

1. Growth, saving, and r − g. Piketty (2014) argues that a fall in the growth rate of the
economy is likely to lead to an increase in the difference between the real interest rate
and the growth rate. This problem asks you to investigate this issue in the context of
the Ramsey-Cass-Koopmans model. Specifically, consider a RCK economy that is on
its balanced-growth path,

ċ ( t ) f ′ ( k ( t )) − ρ − θ g
= , (1)
c(t ) θ
k̇ ( t ) = f ( k ( t )) − c ( t ) − ( n + g ) k ( t ), (2)

and suppose there is a permanent fall in g.

(a) How, if at all, does this affect the k̇ ( t ) = 0 curve?


(b) How, if at all, does this affect the ċ ( t ) = 0 curve?
(c) At the time of the change, does c rise, fall, or stay the same, or is it not possible
to tell?
(d) At the time of the change, does r − g rise, fall, or stay the same, or is it not possible
to tell?
(e) In the long run, does r − g rise, fall, or stay the same, or is it not possible to tell?
(f) Find an expression for the impact of a marginal change in g on the fraction of
output that is saved on the balanced growth path. Can one tell whether this
expression is positive or negative?
(g) For the case where the production function is Cobb-Douglas, f ( k ) = kα , rewrite
your answer to part (f) in terms of ρ, n, g, θ , and α. (Hint: Use the fact that
f ′ ( k∗ ) = ρ + θ g.)

2. A closed-form solution of the Ramsey model. (This follows Smith, 2006.) Consider
the Ramsey model with Cobb-Douglas production, y ( t ) = k ( t )α , and with the
coefficient of relative risk aversion (θ ) and capital’s share (α) assumed to be equal.

(a) What is k on the balanced growth path (k∗ )?


(b) What is c on the balanced growth path (c ∗ )?

1
(c) Let z ( t ) denote the capital-output ratio, k ( t )/ y ( t ), and x ( t ) denote the
consumption-capital ratio, c ( t )/ k ( t ). Find expressions for ż ( t ) and ẋ ( t )/ x ( t )
in terms of z, x, and the parameters of the model.
(d) Tentatively conjecture that x is constant along the saddle path. Given this
conjecture:
(i) Find the path of z given its initial value, z (0).
(ii) Find the path of y given the initial value of k, k (0). Is the speed of
convergence to the balanced growth path, d ln [ y ( t ) − y ∗ ] / d t, constant as
the economy moves along the saddle path?
(e) In the conjectured solution, are the equations of motion for c and k, equations
(1) and (2), satisfied?

3. An interesting situation in the RCK model.

(a) Consider the RCK model where k at time 0 is at the golden-rule level: k (0) = k GR .
Sketch the paths of c and k in a phase diagram.
(b) Consider the same initial situation as in part (a), but in the version of the model
that includes government purchases. Assume  that G is constant and equal Ḡ.
Crucially, Ḡ is strictly less than f k GR − ( n + g ) k GR and strictly great than
f ( k∗ ) − ( n + g ) k∗ (where k∗ is the level of k on the balanced growth path the
economy would have if G were constant and equal to 0). Sketch the paths of c
and k in a phase diagram.

† These are exercise problems, 2.6, 2.9, and 2.13 from Advanced Macroeconomics by David
Romer, 5th Edition, McGraw-Hill.

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