Global Dynamics and Optimal Policy in the Ak Model with Anticipated Future Consumption

Abstract

This paper analyzes the Ak model with anticipated future consumption. In the model with internal anticipation individual’s utility depends on current consumption and a forward-looking reference level which is formed from individual’s own future consumption. The global dynamics of the economy is characterized by means of a qualitative phase diagram analysis. In the model with external anticipation the consumption reference level is formed from economy-wide average future consumption, which is taken as given by individuals and causes the competitive equilibrium to be inefficient. Characterizing the global dynamics of the economy is required to characterize an optimal fiscal policy that corrects the inefficiency brought about by this external effect.