Behavior of interest rates in a general equilibrium multisector model with irreversible investment

Published

Journal Article

The behavior of the real interest rate in a general equilibrium multisector model with irreversible investment is examined. It is shown that in such a model purely sectoral shocks can lead to substantial variation in the real interest rate and other aggregate time series. A source of variation in aggregate time series that is not found in one-sector models is thus examined, and the implications of this source of variation for the behavior of the interest rate are highlighted. Such a model seems to better capture the relationship among the real interest and output or investment than the standard one-sector stochastic growth model. It is also shown that, because of a desire to smooth consumption, with irreversible investment a rise in uncertainty concerning the future return to capital tends to lead to more current investment and a lower real interest rate.

Duke Authors

Cited Authors

  • Coleman, WJ

Published Date

  • December 1, 1997

Published In

Volume / Issue

  • 1 / 1

Start / End Page

  • 206 - 227

International Standard Serial Number (ISSN)

  • 1365-1005

Citation Source

  • Scopus