Reverse Capital Deepening and the Numeraire: a note
Heinz Kurz () and
Neri Salvadori ()
Review of Political Economy, 1998, vol. 10, issue 4, 415-426
This note discusses the implication of reverse capital deepening for neoclassical theory, placing special emphasis on the role of the numeraire. It is shown that under certain assumptions, specified in the note, a supply function of capital can be built up that is independent of the demand function. The supply of capital is given in terms of the consumption unit. Reverse capital deepening is reflected in upward sloping segments of the corresponding demand function. A change in numeraire, while generally affecting the shape of the demand function, does not affect the stability property of equilibrium, because it will also affect the shape of the supply function. Hence, what matters is not whether the demand function is upward sloping or not, but whether it cuts the supply function from above or from below. This property, however, is preserved with a change in the numeraire.
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