Book contents
- Frontmatter
- Contents
- Introduction
- PART I POSITIVE GROWTH THEORY
- PART II OPTIMAL GROWTH THEORY
- PART III A UNIFIED APPROACH
- 11 Preliminaries: interest rates and capital valuation
- 12 From arbitrage to equilibrium
- 13 Optimal savings: a general approach
- 14 Problems in growth: common traits between planned economies and poor countries
- 15 From Ibn Khaldun to Adam Smith, and a proof of Smith's conjecture
- In conclusion: on the convergence of ideas and values through civilizations
- Further reading, data on growth and references
- Index
11 - Preliminaries: interest rates and capital valuation
Published online by Cambridge University Press: 01 February 2010
- Frontmatter
- Contents
- Introduction
- PART I POSITIVE GROWTH THEORY
- PART II OPTIMAL GROWTH THEORY
- PART III A UNIFIED APPROACH
- 11 Preliminaries: interest rates and capital valuation
- 12 From arbitrage to equilibrium
- 13 Optimal savings: a general approach
- 14 Problems in growth: common traits between planned economies and poor countries
- 15 From Ibn Khaldun to Adam Smith, and a proof of Smith's conjecture
- In conclusion: on the convergence of ideas and values through civilizations
- Further reading, data on growth and references
- Index
Summary
Throughout this book, we have underlined the role of investment in the growth process. Until now, however, we have considered that the decision to invest was either exogenous (independent of any variable in the system) or driven by the general aim of maximizing a sum of discounted utility flows, as we have described it in our chapters on optimal growth theory. But so far we have left aside the essential role played by the rate of interest, the price of loanable funds which is both a cost to investors in capital goods and a reward to those agents who are willing to supply those funds. For investors, we know from general economic principles that their decision to invest depends both on expected future rewards and on the rate of interest.
Along a growth process, four prices are in search of an equilibrium: the spot price of any capital good, its future price, the rental rate, and the rate of interest. Those four prices are linked in a fundamental equation developed formally for the first time by Irving Fisher (1896). This equation will turn out to be of central importance: it has far reaching, surprising consequences. In particular, we will demonstrate that if competitive equilibrium enforces it, society maximizes the sum of all future discounted consumption flows it can acquire.
Before showing this, we have to be very precise about the nature of the interest rates and the process by which equilibrium can be reached simultaneously on the capital goods market and on the loanable funds market.
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- Chapter
- Information
- Economic GrowthA Unified Approach, pp. 263 - 292Publisher: Cambridge University PressPrint publication year: 2009