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A generalization of Ramsey rule on discount rate with regime switching

journal contribution
posted on 06.07.2018, 10:44 by Seyoung Park
I generalize the following rule of Ramsey (1928) on the discount rate with regime switching: the discount rate is the sum of the rate of pure time preference and the product of the consumption elasticity of marginal utility and the consumption growth rate. The Ramsey rule can be extended to regime-dependent interest-rate formulas for discounting future regime changes. Notwithstanding debate about empirically plausible values of the rate of pure time preference, I theoretically show that the effect of pure time preference is overwhelmingly dominated by the effect of the regime switching parameter. This is closely associated with consumption smoothing consequences across regimes.

Published in

Economics Letters

170

147-150

Citation

PARK, S., 2018. A generalization of Ramsey rule on discount rate with regime switching. Economics Letters, 170, pp. 147-150.

Elsevier

Version

AM (Accepted Manuscript)

Publisher statement

This paper was accepted for publication in the journal Economics Letters and the definitive published version is available at https://doi.org/10.1016/j.econlet.2018.06.011

12/06/2018

2018-06-15

2018

0165-1765

en

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