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Behavior Of Interest Rates In A General Equilibrium Multisector Model With Irreversible Investment

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  • COLEMAN II, WILBUR JOHN

Abstract

The behavior of the real interest rate in a general equilibriummultisector model with irreversible investment is examined. It isshown that in such a model purely sectoral shocks can lead tosubstantial variation in the real interest rate and other aggregatetime series. A source of variation in aggregate time seriesthat is not found in one-sector models is thus examined, and theimplications of this source of variation for the behavior of theinterest rate are highlighted. Such a model seems to better capture therelationship among the real interest and output or investment thanthe standard one-sector stochastic growth model. It is also shownthat, because of a desire to smooth consumption, with irreversibleinvestment a rise in uncertainty concerning the future return tocapital tends to lead to more current investment and a lowerreal interest rate.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 1 (1997)
Issue (Month): 01 (January)
Pages: 206-227

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Handle: RePEc:cup:macdyn:v:1:y:1997:i:01:p:206-227_00

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Cited by:
  1. Lawrence J. Christiano & Jonas D.M. Fisher, 1994. "Algorithms for solving dynamic models with occasionally binding constraints," Working Paper Series, Macroeconomic Issues 94-6, Federal Reserve Bank of Chicago.
  2. Valerie A. Ramey & Matthew D. Shapiro, 1998. "Displaced Capital," NBER Working Papers 6775, National Bureau of Economic Research, Inc.
  3. Marcelo Veracierto, 1998. "Plant level irreversible investment and equilibrium business cycles," Working Paper Series WP-98-1, Federal Reserve Bank of Chicago.
  4. Muro, Kazunobu, 2007. "Individual preferences and the effect of uncertainty on irreversible investment," Research in Economics, Elsevier, vol. 61(4), pages 191-207, December.
  5. Sumru Altug & Fanny S. Demers & Michel Demers, 2004. "Tax Policy and Irreversible Investment," CDMA Working Paper Series 200404, Centre for Dynamic Macroeconomic Analysis.
  6. Miquel Faig, 1997. "INVESTMENT IRREVERSIBILITY IN GENERAL EQUILIBRIUM: Capital Accumulation, Interest Rates, and the Risk Premium," Working Papers faig-97-01, University of Toronto, Department of Economics.
  7. Ádám Reiff, 2010. "Firm-level adjustment costs and aggregate investment dynamics – Estimation on Hungarian data," MNB Working Papers 2010/2, Magyar Nemzeti Bank (the central bank of Hungary).
  8. Kogan, Leonid, 2004. "Asset prices and real investment," Journal of Financial Economics, Elsevier, vol. 73(3), pages 411-431, September.
  9. Miquel Faig, 1999. "Asset Pricing, Growth, And The Business Cycle With Irreversible Investment," Working Papers faig-98-02, University of Toronto, Department of Economics.

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