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The Interest Rate and Capital Durability, and the Importance of Methodological Pluralism

Author

Listed:
  • Roder van Arkel

    (Research Institute, Social Trade Organisation, Utrecht, The Netherlands)

  • Koen Vermeylen

    (University of Amsterdam)

Abstract

Champions of sustainable growth often call for more durable production technologies with less capital depreciation. As investment in more durable capital is encouraged by lower interest rates, we investigate whether policy makers can steer the economy towards a path with low interest rates in order to stimulate more durable capital formation. We study this question from the viewpoint of two different macroeconomic paradigms, with three different modeling strategies, and get three fundamentally different and even contradicting answers. As none of these paradigms can claim to be superior to the other one, we argue that all modeling strategies may yield valuable insights, which leads to nuanced and careful policy advice. The paper is therefore an illustration of the importance of methodological pluralism in addressing macro-environmental questions where the interest rat e takes center stage.

Suggested Citation

  • Roder van Arkel & Koen Vermeylen, 2013. "The Interest Rate and Capital Durability, and the Importance of Methodological Pluralism," Tinbergen Institute Discussion Papers 13-202/VI, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20130202
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    References listed on IDEAS

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    1. John B. Davis & D. W. Hands & Uskali Mäki (ed.), 1998. "The Handbook of Economic Methodology," Books, Edward Elgar Publishing, number 741.
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    4. Rezai, Armon & Taylor, Lance & Mechler, Reinhard, 2013. "Ecological macroeconomics: An application to climate change," Ecological Economics, Elsevier, vol. 85(C), pages 69-76.
    5. Xavier Gabaix, 2012. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(2), pages 645-700.
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    More about this item

    Keywords

    interest rate; capital durability; depreciation rate; sustainability; methodological pluralism;
    All these keywords.

    JEL classification:

    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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