Economic Growth and Wicksell's Cumulative Process

Martin J. Beckmann

No 120, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Assume a homogeneous production function, a constant rate of population growth and a monetary policy which keeps the rate of interest fixed. With initial unemployment there exists an unstable process of balanced growth. Under initial full employment there exists a natural rate of interest (possibly zero or infinite) such that (1) at interest rates below the natural rate balanced growth is attained and the price level is rising; (2) at interest rate above the natural rate both employment and the price level are falling. Explicit solutions are given for Cobb-Douglas production functions. The "optimal" rate of interest which maximizes per capita consumption at any time during balanced growth is shown to equal the rate of growth.

Pages: 33 pages
Date: 1961
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