Working Paper: NBER ID: w8635
Authors: Andrew B. Abel
Abstract: The Modified Golden Rule, which relates the rate of return on capital and the growth rate of the capital stock along long-run growth paths that maximize the utility of a representative infinitely-lived consumer, is invariant to the introduction of convex capital adjustment costs. Therefore, along balanced growth paths in neoclassical optimal growth models with an exogenous long-run growth rate of capital, the rate of return is invariant to the introduction of convex adjustment costs, though the capital-labor ratio is reduced along such paths. In AK models, convex adjustment costs reduce the growth rate and rate of return on capital.
Keywords: convex adjustment costs; rate of return; modified golden rule; neoclassical growth models; capital accumulation
JEL Codes: E2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| long-run rate of return on capital (E22) | invariant to the introduction of convex adjustment costs (D11) |
| introduction of convex adjustment costs (D24) | does not alter the modified golden rule relationship between the rate of return and the growth rate of capital (O40) |
| convex adjustment costs (D24) | reduce the capital-labor ratio and the growth rate of capital in AK models (O41) |
| convex adjustment costs (D24) | do not affect the rate of return's relationship with the growth rate in the modified golden rule context (O40) |