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The Real Rate of Interest: A Theoretical Analysis

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  • Bliss, Christopher

Abstract

A theoretical view of the real rate of interest, such as is provided by models of economic growth, is presented. That question is of compelling interest, even though the issues are so long-run as to be of little practical importance. Models reviewed include the Solow model, and its disaggregated extension by Stiglitz; endogenous growth models; the Ramsey model; and the Diamond capital model. All these models are less than fully adequate to answer key questions. Solow-type models are good at demonstrating the influence of grand changes, such as alterations in saving rates, or demographic changes. However key variables--particularly the saving rate--are treated as constants. The Ramsey model, on the other hand, assumes in effect that a major influence on the real rate is a given impatience parameter. The Diamond model is ideal for economies dominated by pension fund saving, but does not describe any actual economy. Copyright 1999 by Oxford University Press.

Suggested Citation

  • Bliss, Christopher, 1999. "The Real Rate of Interest: A Theoretical Analysis," Oxford Review of Economic Policy, Oxford University Press, vol. 15(2), pages 46-58, Summer.
  • Handle: RePEc:oup:oxford:v:15:y:1999:i:2:p:46-58
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    Cited by:

    1. Bliss, Christopher, 2004. "Koopmans recursive preferences and income convergence," Journal of Economic Theory, Elsevier, vol. 117(1), pages 124-139, July.
    2. Ito, Hiro, 2003. "Was Japan’s Real Interest Rate Really Too High During the 1990s? The Role of the Zero Interest Rate Bound and Other Factors," Santa Cruz Department of Economics, Working Paper Series qt48k5q6vd, Department of Economics, UC Santa Cruz.
    3. Bonatti, Luigi, 2005. "Growth and employment differentials under alternative wage-setting institutions and integrated capital markets," Journal of Macroeconomics, Elsevier, vol. 27(4), pages 724-746, December.
    4. Christian Upper & Andreas Worms, 2003. "Real long-term interest rates and monetary policy: a cross-country perspective," BIS Papers chapters,in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 234-257 Bank for International Settlements.
    5. Robert A. Becker, 2012. "Optimal growth with heterogeneous agents and the twisted turnpike: An example," International Journal of Economic Theory, The International Society for Economic Theory, vol. 8(1), pages 27-47, March.

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