The Ramsey Steady State Conundrum in Heterogeneous-Agent Economies

RePEc Short ID: pch650
ORCID iD: 0000-0002-6820-1197

Chien, YiLi; Wen, Yi

doi:10.20955/wp.2022.009

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

Status: Published in Journal of Economic Theory