The Nonlocal Ramsey Model for an Interacting Economy

TL;DR

This paper introduces a nonlocal extension of the Ramsey model to better capture spatial interactions in an economy, moving beyond traditional local diffusion assumptions.

Contribution

It develops a novel nonlocal Ramsey model incorporating spatial interactions, advancing the modeling of economic growth with spatial effects.

Findings

Demonstrates the model's ability to capture long-range spatial interactions.

Shows differences between local and nonlocal spatial dynamics.

Provides a framework for analyzing spatial economic policies.

Abstract

The Ramsey model, first introduced by F. Ramsey in 1928, has become a cornerstone in the economic growth theory. Combined with the Solow model in the 1950s by the economists Cass (1965) and Koopmans (1965), it is still one of the most used neoclassical growth models. Due to its general and universal structure, it is widely used in various applications. Thus, many versions, including the effects of taxation, government spendings and population growth exist (see amongs others Sorger (2002), Barro (1990), and Acemoglu (2009)). The central idea in the Ramsey model is the endogenous saving rate, which is determined within the optimization process in the model via a lifetime utility maximization approach in the consuming sector. Though originally only time dependent, the Ramsey model has been spatialized in the last two decades in the context of the Economic Geography, started by Krugman (1991). The first who introduced a spatial version of the Ramsey model was Brito (2001). This local version of the spatial Ramsey model assumes that the capital accumulation process in time and space can be modeled as a heat equation, with a local diffusion operator to describe the mobility of capital across space. This assumption has not been contested until today.