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A0558
Title: A generalization of Ramsey's on discount rate with regime-switching by martingale approach Authors:  Qi Li - Pusan National University (Korea, South) [presenting]
Abstract: The aim is to generalize the following Ramsey's rule on discount rate with regime-switching by a martingale approach: the discount rate is the sum of the rate of pure time preference and the product of the consumption elasticity of marginal utility and the consumption growth rate. We first characterize an implicit form of the equivalent martingale measure under regime switch. The ability to derive the unique state price density concerning the risk-neutral Poisson intensity under regime switching in closed form is another distinguishing feature. We show that Ramsey's rule can be extended to regime-dependent interest-rate formulas for discounting future regime changes. Furthermore, we also show that the effect of pure time preference is overwhelmingly dominated by the effect of the regime-switching parameter. This is closely related to the consumption smoothing consequences across regimes in the long term.