Behavior Of Interest Rates In A General Equilibrium Multisector Model With Irreversible Investment
AbstractThe 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 InfoArticle provided by Cambridge University Press in its journal Macroeconomic Dynamics.
Volume (Year): 1 (1997)
Issue (Month): 01 (January)
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