Ewald, C. and Geissler, J. (2010) Some notes on golden rules and risk aversion in a Merton type Solow growth model. International Review of Applied Financial Issues and Economics, 2(4), 760- 768.
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Abstract
We consider Merton's (1975) version of the Solow Growth model, where capital per labor is assumed to follow the diffusion process dk(t ) = [sf (k(t ))- (n +l -s2 )k(t )]dt +sk(t )dW(t ), with constant per capita savings rate s. Merton defined a golden rule in this context as one for which expected utility from consumption c = (1- s)f (k ) under the equilibrium distribution of capital/output becomes maximal. One of the limitations of Merton's utility based setup, is that risk aversion and uncertainty have no effect on golden rule consumption. As an alternative we propose a setup in which mean-variance optimization is the objective. We then show, that in difference to Merton (1975), risk-aversion and uncertainty do have an effect on golden rule consumption, even if in the simple case of a Cobb-Douglas production function.
Item Type: | Articles |
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Status: | Published |
Refereed: | Yes |
Glasgow Author(s) Enlighten ID: | Ewald, Professor Christian |
Authors: | Ewald, C., and Geissler, J. |
Subjects: | H Social Sciences > HB Economic Theory |
College/School: | College of Social Sciences > Adam Smith Business School > Economics |
Journal Name: | International Review of Applied Financial Issues and Economics |
ISSN: | 9210 - 1737 |
Published Online: | 19 November 2010 |
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