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On the Invariance of the Rate of Return to Convex Adjustment Costs

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  • Andrew B. Abel

    (Wharton School, University of Pennsylvania)

Abstract

The Modified Golden Rule, which relates the rate of return on capital and the growth rate of the capital stock along long-run growth paths that maximize the utility of a representative infinitively-lived consumer, is invariant to the introduction of convex capital adjustment costs. Therefore, along balanced growth paths in neoclassical optimal growth models with an exogenous long-run growth rate of capital, the rate of return is invariant to the introduction of convex adjustment costs, though the capital-labor ratio is reduced along such paths. In AK models, convex adjustment costs reduce the growth rate and rate of return of capital. (Copyright: Elsevier)

Suggested Citation

  • Andrew B. Abel, 2002. "On the Invariance of the Rate of Return to Convex Adjustment Costs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 586-601, July.
    • Handle: RePEc:red:issued:v:5:y:2002:i:3:p:586-601
    DOI: 10.1006/redy.2001.0158
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    References listed on IDEAS

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    Cited by:

    1. Claudio Campanale & Rui Castro & Gian Luca Clementi, 2010. "Asset Pricing in a Production Economy with Chew-Dekel Preferences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 379-402, April.
    2. Michael C. Burda, 2006. "Factor Reallocation in Eastern Germany after Reunification," American Economic Review, American Economic Association, vol. 96(2), pages 368-374, May.
    3. Burda, Michael C., 2008. "What kind of shock was it? Regional integration and structural change in Germany after unification," Journal of Comparative Economics, Elsevier, vol. 36(4), pages 557-567, December.
    4. Bond, Stephen R. & Söderbom, Måns & Wu, Guiying, 2011. "Pursuing the wrong options? Adjustment costs and the relationship between uncertainty and capital accumulation," Economics Letters, Elsevier, vol. 111(3), pages 249-251, June.
    5. Andrew B. Abel, 2003. "The Effects of a Baby Boom on Stock Prices and Capital Accumulation in the Presence of Social Security," Econometrica, Econometric Society, vol. 71(2), pages 551-578, March.
    6. Till Gross, 2013. "Capital Tax Competition and Dynamic Optimal Taxation," Carleton Economic Papers 13-08, Carleton University, Department of Economics.
    7. Rui Castro & Claudio Campanale & Gian Luca Clementi, 2007. "Asset Pricing in a General Equilibrium Production Economy with Chew-Dekel Risk Preferences," 2007 Meeting Papers 503, Society for Economic Dynamics.

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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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