Unrestricted Consumption under a Deterministic Wealth and an Ornstein-Uhlenbeck Process as a Discount Rate

Abstract

We consider an individual or household endowed with an initial capital and an income, modeled as a linear function of time. Assuming that the discount rate evolves as an Ornstein-Uhlenbeck process, we target to find an unrestricted consumption strategy such that the value of the expected discounted consumption is maximized. Differently than in the case with restricted consumption rates, we can determine the optimal strategy and the value function.