The use of a constrained or restricted optimization problem is not a
new approach to the analysis of a suboptimal dynamic equilibrium.
For example, it has been widely used in the perfect-foresight models
of inflation. Nonetheless, it is useful to describe this method in some
detail because previous applications do not highlight the generality of
the approach and because the dynamic setting tends to obscure its
basic simplicity. Hence, I start by calculating a competitive equilibrium
for a greatly simplified version of the growth model.
Specifically, consider a discrete-time model of growth with