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Aine Seitz McCarthy
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My macro theory professor on the transversality condition

9/25/2012

4 Comments

 
This condition basically says, don't save too much. It's not a rule, just a condition for optimality. It's because if a consumer saves too much, she's just not enjoying herself.

Most of you were told: Johnny, study a lot, work hard. Then when you're old, you will be able to enjoy yourself. But you're graduate students. It's too late for you guys. At this point, you're completely incapable of enjoying yourself.

But we can at least study normal people who enjoy themselves.

4 Comments
Nikhil
9/25/2012 07:50:23 am

Aine, I thought the TVC argument on savings was to just not leave behind any assets (thus any consumptions due to assets left behind add no utility). Limit (t->inf) B*At*U'(Ct) = 0. So there is a path for savings so long as we consume all assets saved which result in positive utility before we pass.

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Justin link
9/25/2012 11:11:17 am

Yeah, I think it's what Nikhil's saying. Basically you can't optimize a non-convergent series over infinite time. Can't used fixed point theorems or functional equations.

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ASM
9/25/2012 12:44:18 pm

You are free to intepret the condition however you please. This, however, is a direct quote.

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Travis
9/26/2012 03:57:10 am

I'm pretty sure it means if you use rocket science to guide economic policy then your rocket goes into a recession. Something like that.

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    Aine Seitz McCarthy

    International development, economics and some pretty ambitious ideas from a stubborn graduate student clinging to her sense of adventure.


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