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A generalization of Ramsey rule on discount rate with regime switching
journal contribution
posted on 2018-07-06, 10:44 authored by Seyoung ParkI generalize the following rule of Ramsey (1928) on the discount rate with regime switching: the discount rate is the sum of the rate of pure time
preference and the product of the consumption elasticity of marginal utility and the consumption growth rate. The Ramsey rule can be extended
to regime-dependent interest-rate formulas for discounting future regime changes. Notwithstanding debate about empirically plausible values of the
rate of pure time preference, I theoretically show that the effect of pure time preference is overwhelmingly dominated by the effect of the regime switching parameter. This is closely associated with consumption smoothing consequences
across regimes.
History
School
- Business and Economics
Department
- Business
Published in
Economics LettersVolume
170Pages
147-150Citation
PARK, S., 2018. A generalization of Ramsey rule on discount rate with regime switching. Economics Letters, 170, pp. 147-150.Publisher
ElsevierVersion
- AM (Accepted Manuscript)
Publisher statement
This paper was accepted for publication in the journal Economics Letters and the definitive published version is available at https://doi.org/10.1016/j.econlet.2018.06.011Acceptance date
2018-06-12Publication date
2018-06-15Copyright date
2018ISSN
0165-1765Publisher version
Language
- en