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Optimal growth theory: Challenging problems and suggested answers

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  • La Grandville, O. de

Abstract

We argue that optimal economic growth is confronting serious applicability problems, having nothing to offer in these days of high public deficits accompanied by high unemployment rates. In particular, the theory is not capable of indicating optimal savings rates; those are systematically in ranges that can be considered as unacceptable, or are accompanied by unrealistically high real growth rates. Faulty is the systematic use of arbitrary utility functions, which turn out to be contradictory to competitive equilibrium. We then show how relying on the hypothesis of competitive equilibrium yields reasonable, perfectly acceptable numbers for the optimal savings rate.

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  • La Grandville, O. de, 2014. "Optimal growth theory: Challenging problems and suggested answers," Economic Modelling, Elsevier, vol. 36(C), pages 608-611.
    • Handle: RePEc:eee:ecmode:v:36:y:2014:i:c:p:608-611
    DOI: 10.1016/j.econmod.2013.02.019
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    References listed on IDEAS

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    1. Takashi Kamihigashi & Santanu Roy, 2006. "Dynamic optimization with a nonsmooth, nonconvex technology: the case of a linear objective function," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 29(2), pages 325-340, October.
    2. de La Grandville Olivier, 2012. "How Much Should a Nation Save? A New Answer," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(2), pages 1-36, April.
    3. Dorfman, Robert, 1969. "An Economic Interpretation of Optimal Control Theory," American Economic Review, American Economic Association, vol. 59(5), pages 817-831, December.
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