MT - 02. Neoclassical Growth

Question 1

Neoclassical models:

Answer 1

• Neoclassical growth models: 2 entities (HH and Firms), 3 markets (Goods, Capital and Labour)  Extend with population and technology growth

Question 2

Models with Capital Accumulation

Answer 2

• Models with accumulation of capital: i.) OLG models, ii.) Representative agent models

Question 3

OLG

Answer 3

• OLG Models –> Intergenerational assessment like gov. debt
o Not tractable beyond 2 generations
• Standard OLG model hits 4/7 Kaldor facts, but doesn’t grow
o Labour augmenting technological change –> Brings growth into the model, only impact is via firm side wage and real rate setting –> All 7 Kaldor Facts Hit
o Government spending in the OLG model:
- Tax the young –> Expression for saving is unchanged as Ricardian Equivalence holds!
- Tax future young –> Capital declines then grows back slowly, broken Ric. Equivalence as one generation benefitted!

Question 4

Ramsey Model

Answer 4

Overall Structure

• Ramsey growth model –> Lump sum taxes are non-distortionary
o Anticipated vs. unanticipated changes and how this impacts dynamics

Question 5

Ramsey (1928)
Cass (1965)
Koopmans (1965

Answer 5

Ramsey model - avoids all market imperfections, homogeneous agents etc.

Question 6

Samuelson (1958), Diamond (1965)

Answer 6

OLG models - continual entry of new HH into economy, dynamic inefficiencies in OLG model

Question 7

Phelps (1966)

Answer 7

Discuss how growth models can be analysed when households can obtain infinite utility.

Question 8

Blanchard and Fisher (1989)

Answer 8

Social planner formal solution to Ramsey model