Some notes on golden rules and risk aversion in a Merton type Solow growth model

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.

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
• 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