A simple dynamic general equilibrium model (Q1821676)

In the present paper an economy with only a single good but with \(H>1\) infinitely-lived consumers that operate in a continuous-time framework is analysed. The utility functions are assumed to be recursive and not additive. In other words the rate of time preference is not constrained to be constant, but rather can vary with the consumption path where it is evaluated. The novel results can be summarized as follows: (i) the steady state is unique and is independent of initial conditions, (ii) local stability given ''increasing marginal impatience'' with no restriction on the level of discountig can be shown, (iii) the model provides a tractable framework for the analysis of comparative dynamic consequences of wealth redistribution. From a mathematical point of view the concept of a Volterra derivative is applied to deal with a recursive utility function. Solving the optimization problems of consumers, control theory with integral constraints is used. The comparative dynamics analysis is accomplished by linearization of the dynamic system about the steady state. This yields a constant coefficient, linear differential equation system which can be solved explicitly. The paper provides a significant contribution to general equilibrium theory in economics.