6.4 The log-linear Ramsey model
The log-linear version of (25a) is given by
ʌ
(43a)
[γ(1 — σ) — 1]^t = — (1 — γ)(1 — σ)mt + At + (1 — Y)(1 - σ)πt.
Log-linearizing (25e) delivers:
n τ 00gy
η т—n n t —w t +1 — τ 0 y t = λt —
τ0 + τ 00gy
— τ0
πt —
τ 00gy
1 — τ 0
g t,
(43b)
where τ0 (τ00) is the marginal tax rate (the second derivative of the tax function)
computed at the steady state solution of gy = wn + rk. The cost-minimizing conditions
(16) and (15) provide two additional equations:
an t + Wj t = αk t — x t + zt,
(43c)
(43d)
( α — 1) n t + r t = ( α — 1)fc t — χ t + z t.
The log-linear version of the aggregate production function is given by:
( α — 1) n t + y t = αk t + z t- (43e)
The definition of gross investment it = yt — ct implies
ʌ
[( y/i ) — 1] ^ t — ( y/i )y t + it = 0 - (43f)
Finally, the profit equation Ωt = yt (1 — gt)) provides the following log-linear equation:
ʌ
—yt + ω t = (1 — e )g t- (43g)
The five equations that determine the dynamics of the log-linear model are derived
from the economy’s resource constraint kt+1 = (1 — δ)kt + yt — ct, the Euler equations
for capital and money balances, (25b) and (25c), the definition of beginning-of-period
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