An Open-Economy Ramsey-Cass-Koopmans Model in Reduced Form

17 Pages Posted: 21 Sep 2021

See all articles by Daniel Spiro

Daniel Spiro

Uppsala University, Dept. of Economics

Date Written: 2021

Abstract

What is a good reduced-form representation of Ramsey-Cass-Koopmans. (RCK) model? Solow’s model (despite non-optimizing agents) provides predictions largely consistent with a closed-economy RCK but fundamentally differs regarding open-economy income convergence. Where RCK predicts partial income and consumption convergence between open economies Solow predicts full convergence. This paper presents, by a small modification of the savings behavior in the Solow model, a framework that matches RCK’s properties in closed and open economies. The model, labeled rSolow, is analytically tractable, allowing closed-form solutions of all variables, thus makes several explicit and novel predictions. This includes how income and inequality depend on country size; that income growth will be a U-shaped function of initial income thus creating differentiated convergence; and that poor countries bene.t from higher saving but rich countries may not.

Keywords: convergence, Ramsey, Solow, inequality, growth

JEL Classification: E100, E210, F210, F430, O110

Suggested Citation

Spiro, Daniel, An Open-Economy Ramsey-Cass-Koopmans Model in Reduced Form (2021). CESifo Working Paper No. 9293, Available at SSRN: https://ssrn.com/abstract=3925325 or http://dx.doi.org/10.2139/ssrn.3925325

Daniel Spiro (Contact Author)

Uppsala University, Dept. of Economics ( email )

Box 513
Uppsala, 751 20
Sweden

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