Should the Interest Rate Really Be the Unique Motive to Save in the Ramsey Model?

KHELIFI, Atef (2016): Should the Interest Rate Really Be the Unique Motive to Save in the Ramsey Model? Published in: International Journal of Economics and Finance , Vol. 8, (1 December 2016): pp. 224-237.

Abstract

By assuming that the individual derives utility from consumption only, the resulting optimal decision to save in the Ramsey model depends on the rate of return, given a certain time preference. If therefore the production function is such that this rate of return remains relatively low, the individual reacts unconsciously by refusing to save despite the capital depreciates and the household grows. We argue that it is conceptually necessary in that framework to assume a direct preference for saving (or for thriftiness) in the utility function, not only to make the individual behave as a real human being who cares about the survival of the household, but also to account reasonably for any other motives to save or accumulate than the rate of return. We show it generalizes the model in a way to recover static properties of the exogenous Solow version and to extend results of capitalist spirit models following Zou (1994).

• Item Type: MPRA Paper
• Language: English
• Keywords: bequest; status; thriftiness; capitalist spirit; ramsey model
• Subjects: D - Microeconomics > D9 - Intertemporal Choice; E - Macroeconomics and Monetary Economics > E0 - General; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth Models

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