JEM111: International Macroeconomics Seminar 4

Exercises to the Ramsey Model for Open Economy

1. Basics of the Ramsey model.

a.

Derive the Euler equation and the equation giving the dynamics of capital for a
close economy and an open economy (in discrete time). Show the phase diagram and
denote the equilibrium.
b.
Discuss the solution for a small open economy and the world equilibrium if
there are M countries that differ in time preference.
2. Government spending. Consider the basic Ramsey model. Assume now that there is
government consumption spending of g per capita, financed by a lump-sum tax on all
those currently alive.
a. How does the introduction of tax-financed government spending affect the basic
equations?
b. What is the phase diagram? Assuming the economy is initially in a steady state,
analyze the unanticipated permanent rise in g.
3. Human capital and open economy.
a. Discuss the convergence debate. How can the human capital model help explain the
slow convergence

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