Book contents
- Frontmatter
- Dedication
- Contents
- Foreword
- Preface to the second edition
- Introduction to the first edition
- PART I POSITIVE GROWTH THEORY
- PART II OPTIMAL GROWTH THEORY
- PART III A UNIFIED APPROACH
- 14 Preliminaries: interest rates and capital valuation
- 15 From arbitrage to equilibrium
- 16 Why is traditional optimal growth theory mute? Restoring its rightful voice
- 17 Problems in growth: common traits between planned economies and poor countries
- 18 From Ibn Khaldun to Adam Smith; a proof of their conjecture
- 19 Capital and economic growth in the coming century
- In conclusion: on the convergence of ideas and values through civilizations
- Further reading, data on growth and references
- Index
15 - From arbitrage to equilibrium
from PART III - A UNIFIED APPROACH
Published online by Cambridge University Press: 01 December 2016
- Frontmatter
- Dedication
- Contents
- Foreword
- Preface to the second edition
- Introduction to the first edition
- PART I POSITIVE GROWTH THEORY
- PART II OPTIMAL GROWTH THEORY
- PART III A UNIFIED APPROACH
- 14 Preliminaries: interest rates and capital valuation
- 15 From arbitrage to equilibrium
- 16 Why is traditional optimal growth theory mute? Restoring its rightful voice
- 17 Problems in growth: common traits between planned economies and poor countries
- 18 From Ibn Khaldun to Adam Smith; a proof of their conjecture
- 19 Capital and economic growth in the coming century
- In conclusion: on the convergence of ideas and values through civilizations
- Further reading, data on growth and references
- Index
Summary
In chapter 11, we described outcomes of investing either on the financial market or the capital goods market. We had also made the hypothesis that market forces would be at play to establish an equilibrium between those outcomes. Our aim in this chapter is to describe those forces. We begin with the case of a risk-free world in the sense that the existence of forward markets enables some investors to protect themselves against uncertainty (section 1). We then introduce uncertainty (section 2).
The case of risk-free transactions
We have considered four prices in the Fisher–Solow equation of interest: p(t) is the price of the capital good at time t; p(t + h) is the forward price for time t + h, decided upon at time t; q(t + h) is the forward rental rate of the capital good, to be received at time t + h; and i(t), the interest rate, is the price of loanable funds at time t. Until now, we have just supposed that an equilibrium would exist between these four prices, stemming from an equality between the available returns on the financial market and on the capital goods market. We will now describe the forces that come into play to establish this equilibrium.
Two types of forces should be distinguished. The first is arbitrage; we define arbitrage as the action of individuals who will earn benefits without committing their own resources. The second is investing, i.e. the action of agents who buy capital goods (or assets) with their own resources. In order to simplify the exposition, we suppose that the capital good may be borrowed, and also that we are able to sell it on a forward market.
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- Economic GrowthA Unified Approach, pp. 327 - 334Publisher: Cambridge University PressPrint publication year: 2016