The Euler equation is:


In my lecture notes, I noted that my prof. said something like:

Since our economy is closed, we are going to assume that $\beta(1+r)=1$

What did he mean by this statement? I couldn't get it. Why would closed economy imply this condition. What would happen if $\beta(1+r)>1$ or $<1$?

I'm trying to understand the intuition behind it.

  • 1
    $\begingroup$ My guess is he also said output is constant, so $Y_t = Y_{t+1}$. Then this would make sense. $\endgroup$ – Giskard Sep 29 '17 at 20:56
  • $\begingroup$ @denesp I agree. Such case would ensure that the ratio $C/Y$ does not go to 0 or to 1. However, in principle there is no restriction on $\beta$, as far as I know. $\endgroup$ – luchonacho Sep 29 '17 at 20:58

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