Financial Markets and Stochastic Growth

Leonard Jay Mirman and Klaus Reiner Schenk-Hoppé ()

No iewwp066, IEW - Working Papers from Institute for Empirical Research in Economics - IEW

Abstract: In this paper, we study the effect of financial markets on the investment of a two-good two-country economy with stochastic production in a dynamic framework. Each country produces and invests only one good and, therefore, makes decisions as a central planner in an optimal growth model. Trade between consumers of both countries, however, takes place on competitive (spot or financial) markets. We compare the investment-consumption decisions of both `market' models with the benchmark-case of an integrated world-equilibrium. In the log-linear case, we can uniquely characterize the state-dependent preferences of consumers that lead to dynamically efficient investment decisions. We show that the investment decisions in both `market' models are, in general, inefficient as compared with the efficient, or integrated world economy, case.

Keywords: Solow growth model; random dynamical systems; random fixed points; ergodic Markov equilibria (search for similar items in EconPapers)
JEL-codes: C62 E13 O41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev and nep-fmk
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Related works:
Journal Article: Financial Markets and Stochastic Growth (2003)
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Persistent link: http://EconPapers.repec.org/RePEc:zur:iewwpx:066

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