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Predetermined Interest Rates in a Analytical RBC model

Fève, Patrick, Moura, Alban and Pierrard, Olivier (2018) Predetermined Interest Rates in a Analytical RBC model. Economics Letters, 172. pp. 12-15.

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We solve a version of the analytical Real Business Cycle (RBC) model with a predetermined rate of return on household saving. The solution differs from that of the benchmark RBC model along two dimensions: (i) Policy functions depend on the variance of the technology shock. (ii) There is a suboptimal pattern of excess saving. We discuss the economic intuition underlying these properties. We also demonstrate that unconditional welfare can be higher in the suboptimal model with predetermined interest rates, providing a clear illustration of the pitfall with unconditional welfare comparisons.

Item Type: Article
Language: English
Date: November 2018
Refereed: Yes
Uncontrolled Keywords: RBC model, predetermined interest rates, over-saving, conditional and unconditional welfare
JEL Classification: E21 - Macroeconomics - Consumption; Saving; Aggregate Physical and Financial Consumer Wealth
E32 - Business Fluctuations; Cycles
E43 - Determination of Interest Rates; Term Structure of Interest Rates
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 09 Nov 2018 10:48
Last Modified: 24 Jul 2019 11:38
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