ABSTRACT
We now turn to the neoclassical growth model with an endogenous saving rate, which is often labelled the Ramsey-Cass-Koopmans model, RCK, or simply the Ramsey model (e.g. Barro and Sala-i-Martin 2004, ch. 2). Indeed, Cass (1965) and Koopmans (1965) combined the maximisation for an infinite horizon, suggested by Ramsey (1928) with Solow and Swan’s capital accumulation. In the last of these the savings rate is considered exogenous (see Chapter 9), while for the RCK model it is endogenously computed through a consumer optimisation problem. It aims at studying whether the accumulation of capital accounts for the long term growth. This is accomplished by modelling the inter-temporal allocation of income, i.e, the relation between consumption and savings focusing on the dynamics. By allowing consumers to behave optimally, the analysis permits us to discuss how incentives affect the behaviour of the economy. Now, infinitely-lived households that choose consumption and savings to maximise their dynastic utility, bearing in mind the intertemporal budget constraint, are taken into account. The increase or decrease of the savings rate with economic development affects the transitional dynamics.
