Download PDF by ALVIN H. HANSEN: Monetary Theory and Fiscal Policy

By ALVIN H. HANSEN

ISBN-10: 0313237360

ISBN-13: 9780313237362

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Because qt is equal to p , , it follows from the definition of the user cost in (55) that u t = (r + h)p,. (58) Finally, recall that the partial derivative, CK, is equal to zero in the steady state so that (56) implies that YK(Kt, L,) = u t . (59) Equations (58) and (59) correspond to the user cost of capital and the 29Gould (1968), Treadway (1969), and Abel (1985) express the adjustment cost function as a function of gross investment. Expressing the adjustment cost function as a function of net investment implies that in the long run, when /~ = 0, the value of capital, q,, is equal to its replacement cost, p,, as argued by Tobin (1969).

B. Abel 748 optimization problem, consider a reduction in c, of one unit and an accompanying increase of one unit in W,+ 1. The reduction in c, will reduce current utility on the right-hand side of (34) by u'(c,) and the increase in W,+ 1 will increase the expected present value of next period's utility on the right-hand side of (34) by (1/(1 + p))E,{(1 + rt+l)V'((1 + rt+l)Wt+l) }. At the optimum, the net effect on the consumer's utility will be zero, and hence consumption will be at the optimal level when u'(c,) = (1/(1 + p))E,{(1 + rt+l)V'((1 + G+1)Wt+I)}.

759 Ch. 14: Consumption and Investment desired capital stock derived by Jorgenson under the condition that the price of investment goods, Pt, is constant. The desired capital stock is determined from (59). To illustrate Jorgenson's derivation, as well as the Eisner-Nadiri (1968, 1970) criticism of Jorgenson's derivation, suppose that the revenue function is constant returns to scale in K, and L, and displays a constant elasticity of substitution between K, and t t. In particular, suppose that Y ( K , L ) = A [ m K -~" + (1 - m ) L - 6 ] -1/~ , (60) where A > 0, 0 < m < 1, and ~b > - 1.

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Monetary Theory and Fiscal Policy by ALVIN H. HANSEN


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