Endogenous discount factor (Uzawa)

Dear Community,

I applied the “endogenous discount factor - fix” to induce stationarity as suggested by Schmitt-Grohe, Uribe (2002). I have however difficulties with the economic intuition behind the concept. As Blanchard and Fischer (1999: 73) put it: “The assumption [of EDF] is difficult to defend a priori; indeed, we usually think it is the rich who are more likely to be patient.”

Now I wonder whether EDFs are often used and how their application is reasoned for. Could somebody point me towards a helpful piece of literature that provides some intuition or simply communicate the latter directly? That would be interesting.


There is no good intuitive justification. If you look at the SGU-paper, you will see that it does not really matter in linear models how you close them, i.e. using the EDF gives almost identical results to the other ways of closing the model. That is why people do not really care how you close the model. But you are right that other ways to close the model have a more intuitive justification.

I see. Thank you for the clarification.