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Financial Markets and Stochastic Growth

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Author Info
Leonard J. Mirman
Klaus Reiner Schenk-Hoppé

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Abstract

In this paper, we study the effect of financial markets on the investment of a two-good two-country economy with stochastic production in a dynamic framework. Each country produces and invests only one good and, therefore, makes decisions as a central planner in an optimal growth model. Trade between consumers of both countries, however, takes place on competitive (spot or financial) markets. We compare the investment-consumption decisions of both `market' models with the benchmark-case of an integrated world-equilibrium. In the log-linear case, we can uniquely characterize the state-dependent preferences of consumers that lead to dynamically efficient investment decisions. We show that the investment decisions in both `market' models are, in general, inefficient as compared with the efficient, or integrated world economy, case.

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Paper provided by Institute for Empirical Research in Economics - IEW in its series IEW - Working Papers with number iewwp066.

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Handle: RePEc:zur:iewwpx:066

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Related research
Keywords: Solow growth model; random dynamical systems; random fixed points; ergodic Markov equilibria;

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Find related papers by JEL classification:
C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium
E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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  1. Datta, Manjira & Mirman, Leonard J, 2000. "Dynamic Externalities and Policy Coordination," Review of International Economics, Blackwell Publishing, vol. 8(1), pages 44-59, February. [Downloadable!] (restricted)
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  2. Brock, William A. & Mirman, Leonard J., 1972. "Optimal economic growth and uncertainty: The discounted case," Journal of Economic Theory, Elsevier, vol. 4(3), pages 479-513, June. [Downloadable!] (restricted)
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This page was last updated on 2009-11-26.

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