🤖 AI Summary
This study investigates the structure, dynamic mechanisms, and role as a policy instrument of the real interest rate in an open-market economy. Departing from conventional paradigms, it explicitly models the real interest rate as a control variable within a dynamic general equilibrium framework for open economies and endogenizes its relationship with expected future multi-factor productivity and the utility discount rate. Building on an extension of the Cass–Koopmans–Ramsey model, the analysis reveals that an increase in productivity expectations simultaneously raises both the real interest rate and wage levels. This finding not only uncovers a co-movement mechanism between interest rates and wages but also confirms the model’s consistency with classical growth theory, thereby highlighting its theoretical novelty and explanatory power.
📝 Abstract
This paper addresses the structure and dynamics of an open market economy and its relations with the real interest rate. In this respect, the paper is situated within a broad conventional literature. However, it departs from the standard approach to the interest rate by treating it as a control variable. Even so, the analysis concludes that the two main determinants of the interest rate are the future utility discount rate and expectations regarding future multifactor productivity (labor efficiency). Furthermore, increases in such expectations lead to increases in both the interest rate and wages. These results are consistent with to those obtained with the Cass, Koopmans, Ramsey model.