Working Paper

The Ramsey Steady State Conundrum in Heterogeneous-Agent Economies


Abstract: In infinite horizon, heterogeneous-agent and incomplete-market models, the existence of an interior Ramsey steady state is often assumed instead of proven. This paper demonstrates the critical importance of proving the existence of the Ramsey steady state when conducting theoretical or numerical analysis on optimal fiscal policies. We use an analytically tractable heterogeneous-agent model to make our point by showing that the conditions for the existence of an interior Ramsey steady state are quite sensitive to structural parameter values. In particular, we show that researchers may draw fundamentally misleading conclusions from their analysis when an interior Ramsey steady state does not exist but is erroneously assumed to exist.

Keywords: Optimal Fiscal Policy; Ramsey Problem; Incomplete Markets; Heterogeneous Agents;

JEL Classification: E13; E62; H21; H30;

https://doi.org/10.20955/wp.2022.009

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Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2022-04-14