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Notes on capital theory: a comment on ‘the economic basis of interest rates’

Published online by Cambridge University Press:  20 April 2012

J. E. Woods
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Extract

1. In a recent article in this Journal, Professor Wilkie gave an account of the determination of the rate of interest in a Fisher–Hirshleifer model. In his analysis of a production economy (§§3–7), he appeared to take as intuitively reasonable, not to say axiomatic, the existence of an inverse monotonic relation between the value of investment and the rate of interest. ‘A reduction in the auctioneer's rate of interest will stimulate capital investment.’ (p. 290) Now one of the conclusions to emerge from the capital theory debates in economics of the 1950s and 1960s is that the value of investment is not in general an inversely monotonic function of the rate of interest (see, for example, Harcourt). The purpose of these Notes is to alert actuaries to the existence of this conclusion and discuss some of its implications. To achieve the first objective, I shall need to construct a simple model—this is done in §2. I devote §3 to the analysis of the relation between the value of investment and the rate of interest. I discuss wider implications and draw some conclusions in §4.

Type
Research Article
Information
Journal of the Institute of Actuaries , Volume 116 , Issue 1 , June 1989 , pp. 109 - 126
Copyright
Copyright © Institute and Faculty of Actuaries 1989

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