Optimal consumption with irreversible investment in the context of the Ramsey model

N. Ansari*, A. Van Zon, O. Sleijpen

*Corresponding author for this work

Research output: Chapter in Book/Report/Conference proceedingConference article in proceedingAcademicpeer-review

Abstract

The Ramsey model is widely used in macroeconomic studies, but only few studies consider the irreversibility of investment which is an important aspect of real-life investment. In this paper, we consider a Ramsey model with irreversible investment. While the main focus of the current literature is on a qualitative discussion of such problems, our paper provides a framework for quantitative analysis of the transition path. Finding the optimal transition path in a Ramsey model with irreversible investment requires solving a multistage optimal control problem with two kinds of stages. These stages are called 'free' and 'blocked' intervals in the literature, with zero gross investment in the blocked interval and positive gross investment in the free interval. We show that the optimality conditions for such a problem imply the continuity of the control variable along the transition path, which is an important feature in finding the switching moments between free and blocked intervals. We use this feature and the backward integration method for a quantitative analysis of the transition path.
Original languageEnglish
Title of host publication39TH INTERNATIONAL CONFERENCE ON MATHEMATICAL METHODS IN ECONOMICS (MME 2021)
EditorsRobert Hlavatý
PublisherCzech University of Life Sciences Prague
Pages18-23
Number of pages6
ISBN (Print)9788021331266
Publication statusPublished - 2021
Event39th International Conference on Mathematical Methods in Economics (MME) - Prague, Czech Republic
Duration: 8 Sept 202110 Sept 2021
https://mme2021.czu.cz/en

Conference

Conference39th International Conference on Mathematical Methods in Economics (MME)
Abbreviated titleMME 2021
Country/TerritoryCzech Republic
CityPrague
Period8/09/2110/09/21
Internet address

JEL classifications

  • p28 - "Socialist Systems and Transitional Economies: Natural Resources; Energy; Environment"

Keywords

  • Ramsey model
  • Optimal control theory
  • multistage optimal control problem
  • Irreversibility of investment

Fingerprint

Dive into the research topics of 'Optimal consumption with irreversible investment in the context of the Ramsey model'. Together they form a unique fingerprint.

Cite this