Optimal investment in immobile human capital in an economic and monetary union
We analyse the optimal accumulation of physical and human capital in a small economy in monetary union. We derive the modified golden rule, which states that the optimal rates of investment in physical and human capital depend upon the natural rate of growth and the real interest rate. If they are equal, there exist infinitely many optimal pairs of investment rates. However, if they differ, the golden rule recommends one of two extreme solutions. Optimal investment rates are always linked together by a very simple linear equation (the line H). The economy should always stay on the line H, and move along this line, either up or down, in response to changes in exogenous parameters. These results are illustrated with numerical experiments, based on realistic values of exogenous parameters. Simulations suggest that current levels of investment in human capital in small European countries are way too low.
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Volume (Year): 1 (2009)
Issue (Month): 2 ()
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