Long-term Relation of Interest Rate and Economic Growth Rate
DOI:
https://doi.org/10.33119/SIP.2018.164.9Keywords:
dynamic ineffectiveness, optimal growth, time preferences, natural interest rate, consumption habitsAbstract
The present article deals with the issue of dynamic ineffectiveness, whose appearance was crucial according to Piketty for the establishment of the welfare state after World War II. The dynamic effectiveness is analysed from the perspective of a growth model with an exo- and endogenous interest rate. This analysis indicates a key significance of meeting or not meeting the condition of transversality by the decisions of entities on the accumulation of capital. The condition stops being met if entities do not discount future consumption strongly enough. Next, the authors present possible reasons behind insufficient discounting, also in order to explain historic cases of dynamic ineffectiveness. Among them there is the lack of awareness on the part of entities that the growth rate has permanently accelerated, consumption habits or saving for a planned or potential short-term consumption growth above the long-term achievable level, especially by governments.
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