The role of adjusment costs in interest rate determination

Thumbnail Image
Official URL
Full text at PDC
Publication Date
Advisors (or tutors)
Journal Title
Journal ISSN
Volume Title
Facultad de Ciencias Económicas y Empresariales. Decanato
Google Scholar
Research Projects
Organizational Units
Journal Issue
We study in this paper the equilibrium influence of adjustment costs of capital on interest rates determination. Considering endogenous interest rates in optimal capital accumulation models introduces nonlinearities which together with expectations of future variables make the model hard to analyze. We use here a solution method that has recently been preposed in the literature, to show that the model is able to reproduce some of the correlations among output, consumption, interest rates and capital that can be observed in actual time series data.
Unesco subjects
Gould,J.P. (1968) 'Adjustment Costs in the Theory of Investment of the Firm', Review of Economic Studies, 35, 47-55. Hall,R.E. (1978) Stochastie Implications of the Life Cycle-Permanent Income Hypothesis, Theory and Evidence' Journal of Political Economy, 86. Johnson,L.W. and R.D.Riess (1977) Numerical Analysis, Addison Wesley, London. Litterman,R. and L.Weiss (1985) 'Money, Real Interest Rates and Output: A Reinterpretation of Postwar U.S. Data', Eeonometrica, 53, 129-157. Lucas,R.E. (1967) 'Adjustment Costs and the Theory of Supply', Journal of Political Economy , 75, 321-334. Mortenson,D.T. (1973) 'Generalized Costs of Adjustment and Dynamie Factor Demand Theory', Eeonometrica, 41, 51-60. Novales,A. (1984) 'A StochastiC, Monetary Equilibrium Model of Interest Rates', Working paper, Economics Department, S.U.N.Y. at Stony Brook. Sims,C.A. (1985) 'Solving Nonlinear Stochastie Equilibrium Models "Backwards"', Diseussion Paper No. 206, Economics Department, U. of Minnesota. Treadway,A.B. (1969) 'On Rational Entrepeneurial behaviour and the Demand for Investment' Review of Economic Studies, 36, 227-239. Treadway,A.B. (1970) 'Adjustment Costs and Variable Input in the Theory of the Firm' Journal of Economic Theory', 2, 329-347.