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The optimal consumption function in a Brownian model of accumulation part B: existence of solutions of boundary value problems

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  • Foldes, Lucien

Abstract

In Part A of the present study, subtitled 'The Consumption Function as Solution of a Boundary Value Problem' Discussion Paper No. TE/96/297, STICERD, London School of Economics, we formulated a Brownian model of accumulation and derived sufficient conditions for optimality of a plan generated by a logarithmic consumption function, i.e. a relation expressing log-consumption as a time-invariant, deterministic function H(z) of log-capital z (both variables being measured in 'intensive' units). Writing h(z) = H'(z), J(z) = exp{H(z)-z}, the conditions require that the pair (h,J) satisfy a certain non-linear, non-autonomous (but asymptotically autonomous) system of o.d.e.s (F,G) of the form h'(z) = F(h,J,z), J'(z) = G(h,J) = (h-1)J for real z, and that h(z) and J(z) converge to certain limiting values (depending on parameters) as z tends to + or - infinity. The present paper, which is self-contained mathematically, analyses this system and shows that the resulting two-point boundary value problem has a (unique) solution for each range of parameter values considered. This solution may be characterised as the connection between saddle points of the autonomous systems obtained from (F,G) as z tends to + or - infinity.

Suggested Citation

  • Foldes, Lucien, 2014. "The optimal consumption function in a Brownian model of accumulation part B: existence of solutions of boundary value problems," LSE Research Online Documents on Economics 60956, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:60956
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    File URL: http://eprints.lse.ac.uk/60956/
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    References listed on IDEAS

    as
    1. Foldes, Lucien, 2001. "The optimal consumption function in a Brownian model of accumulation Part A: The consumption function as solution of a boundary value problem," Journal of Economic Dynamics and Control, Elsevier, vol. 25(12), pages 1951-1971, December.
    2. Foldes, Lucien, 1996. "The optimal consumption function in a Brownian model of accumulation. Part a: the consumption function as solution of a boundary value problem," LSE Research Online Documents on Economics 3585, London School of Economics and Political Science, LSE Library.
    3. repec:cep:stitep:297 is not listed on IDEAS
    4. repec:cep:stitep:310 is not listed on IDEAS
    5. Lucien Foldes, 1996. "The Optimal Consumption Function in a Brownian Model of Accumulation, Part B: Existence of Solutions of Boundary Value Problems," STICERD - Theoretical Economics Paper Series /1996/310, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Consumption; capital accumulation; Brownian motion; optimisation; ordinary; differential equations; boundary value problems;
    All these keywords.

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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