Some Notes on Golden Rules and Risk Aversion in a Merton Type Solow Model

11 Pages Posted: 8 Dec 2008 Last revised: 1 Feb 2010

See all articles by Christian-Oliver Ewald

Christian-Oliver Ewald

University of Glasgow; Høgskole i Innlandet

Johannes Geissler

University of St. Andrews - School of Economics and Finance

Date Written: January 28, 2010

Abstract

We consider Merton's version of the Solow model Merton (1975), where capital per labor is assumed to follow the diffusion process: dk(t)=[sf(k(t))-(n lambda-sigma2)k(t)]dt sigmak(t)dW(t), with constant per capital savings rate s. Merton defined a golden rule in this context as one for which expected utility from consumption c=(1-s)f(k) under the equilibrium distribution of capital/output becomes maximal. We discuss some of Merton's results and their limitations and then provide an alternative setup, in which we consider a mean-variance optimizer. We show then, that unless in Merton, risk-aversion and volatility do have an effect on Golden rule consumption, even if a Cobb-Douglas production function is assumed.

Keywords: Economic Growth, Golden Rule, Solow model, Risk Aversion

JEL Classification: C63, G11, G31, G39

Suggested Citation

Ewald, Christian-Oliver and Geissler, Johannes, Some Notes on Golden Rules and Risk Aversion in a Merton Type Solow Model (January 28, 2010). Available at SSRN: https://ssrn.com/abstract=1311969 or http://dx.doi.org/10.2139/ssrn.1311969

Christian-Oliver Ewald (Contact Author)

University of Glasgow ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom

Høgskole i Innlandet ( email )

Lillehammer, 2624
Norway

Johannes Geissler

University of St. Andrews - School of Economics and Finance ( email )

The Scores, Castlecliff
St. Andrews, Fife KY16 8RD
United Kingdom

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