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The Real Interest Rate as a Control Variable in the Open Economy

Author

Listed:
  • Carlos Esteban Posada
  • Liz Londo~no-Sierra

Abstract

This paper addresses the structure and dynamics of an open market economy and its relations with the real interest rate. In this respect, the paper is situated within a broad conventional literature. However, it departs from the standard approach to the interest rate by treating it as a control variable. Even so, the analysis concludes that the two main determinants of the interest rate are the future utility discount rate and expectations regarding future multifactor productivity (labor efficiency). Furthermore, increases in such expectations lead to increases in both the interest rate and wages. These results are consistent with to those obtained with the Cass, Koopmans, Ramsey model.

Suggested Citation

  • Carlos Esteban Posada & Liz Londo~no-Sierra, 2026. "The Real Interest Rate as a Control Variable in the Open Economy," Papers 2605.03966, arXiv.org.
    • Handle: RePEc:arx:papers:2605.03966
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    References listed on IDEAS

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