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Assessing Dynamic Efficiency: Theory and Evidence

  • Andrew B. Abel
  • N. Gregory Mankiw
  • Lawrence H. Summers
  • Richard J. Zeckhauser

The issue of dynamic efficiency is central to analyses of capital accumulation and economic growth. Yet the question of what operating characteristics of an economy subject to productivity shocks should be examined to determine whether or not it is efficient has not been resolved. This paper develops criterion based on observables for determining whether or not an economy is dynamically efficient. The criterion involves a comparison of the cash flows generated by capital with the volume of investment. Its application to the United States economy and the economies of other major OECD nations suggests that they are dynamically efficient.

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File URL: http://www.nber.org/papers/w2097.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2097.

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Date of creation: Dec 1986
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Publication status: published as Review of Economic Studies, Vol. 56, No. 1, pp. 1-20, (January 1989).
Handle: RePEc:nbr:nberwo:2097
Note: EFG PR
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  1. Cass, David, 1972. "On capital overaccumulation in the aggregative, neoclassical model of economic growth: A complete characterization," Journal of Economic Theory, Elsevier, vol. 4(2), pages 200-223, April.
  2. Frederic S. Mishkin, 1982. "The Real Interest Rate: A Multi-Country Empirical Study," NBER Working Papers 1047, National Bureau of Economic Research, Inc.
  3. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  4. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
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  6. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  7. Feldstein, Martin S, 1977. "Does the United States Save too Little?," American Economic Review, American Economic Association, vol. 67(1), pages 116-21, February.
  8. Martin Feldstein & Lawrence Summers, 1977. "Is the Rate of Profit Falling?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(1), pages 211-228.
  9. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  10. Robert J. Shiller, 1984. "Stock Prices and Social Dynamics," Cowles Foundation Discussion Papers 719R, Cowles Foundation for Research in Economics, Yale University.
  11. Feldstein, Martin S, 1976. "Perceived Wealth in Bonds and Social Security: A Comment," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 331-36, April.
  12. Samuelson, Paul A., 1979. "Why we should not make mean log of wealth big though years to act are long," Journal of Banking & Finance, Elsevier, vol. 3(4), pages 305-307, December.
  13. Solow, Robert M., 2000. "Growth Theory: An Exposition," OUP Catalogue, Oxford University Press, edition 2, number 9780195109030, March.
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