THE DIFFUSION OF ECONOMIC ACTIVITY ACROSS SPACE: A NEW APPROACH

Dynamic spatial theory has been a fruitful approach to understanding economic phenomena involving time and space. However, several central questions still remain unresolved in this field. The identification of the social optimal allocation of economic activity across time and space is particularly problematic, not been ensured yet in economic growth. Developing a monotone method, we study the optimal solution of the spatial Ramsey model. Under fairly general assumptions, we prove the existence of unique social optimum. Considering a numerical implementation of our algorithm, we study the role played by capital mobility in the neoclassical growth environment. With capital irreversibility and economic openness, space allows for transitional dynamics. Moreover, in this context, capital mobility is beneficial as well in terms of social welfare and inequality. We also consider an application of our method to an extension of the spatial Ramsey model for optimal land-use planning.

Introduction to Dynamic Macroeconomics

This chapter offers an introduction to the methods and main models used in dynamic macroeconomics. After reviewing key concepts such as lifetime utility maximization and the period-by-period and intertemporal budget constraints, first-order conditions for intertemporal optimization (the Euler equation and the labour-leisure choice) are developed. These methods are applied in developing the workhorse Ramsey model, with discussion of related concepts such as dynamic efficiency and market equilibrium versus the command optimum. An extension of the Ramsey model incorporates adjustment costs in investment and develops the user cost of capital. Furthermore, the Sidrauski model, with its implications for monetary economies, is reviewed. Finally, the discussion turns to another workhorse dynamic model, the overlapping-generations model and its implications. As an application of this model, the properties of various methods of funding social insurance are discussed.

How stationarity contradicts intergenerational equity

We show how the condition of stationarity may contradict intergenerational equity. By formalizing the intuition that less sensitivity remains for the continuation of the stream if sensitivity for the interests of the present is combined with stationarity, we point out conflicts (a) between stationarity and the requirement of not letting the present be dictatorial, and (b) between stationarity and equal treatment of generations. We use the results to interpret the non-stationarity of the Chichilnisky and Rank-discounted utilitarian social welfare functions. Non-stationarity combined with time invariance leads to time inconsistency. We illustrate how such non-stationary social welfare functions can be applied in the Ramsey model if time invariance is imposed.