TY - JOUR AU - Abel,Andrew B. AU - Blanchard,Olivier J. TI - An Intertemporal Model of Saving and Investment JF - National Bureau of Economic Research Working Paper Series VL - No. 885 PY - 1983 Y2 - September 1983 UR - http://www.nber.org/papers/w0885 L1 - http://www.nber.org/papers/w0885.pdf N1 - Author contact info: Andrew B. Abel Wharton School University of Pennsylvania 2315 Steinberg Hall - Dietrich Hall Philadelphia, PA 19104-6367 Tel: 215/898-4801 Fax: 215/573-7244 E-Mail: abel@wharton.upenn.edu Olivier J. Blanchard International Monetary Fund Economic Counsellor and Director Research Department 700 19th Street, NW Rm. 10-700 Washington DC, 20431 Tel: 202-623-7825 Fax: 202-623-7271 E-Mail: blanchar@mit.edu AB - The standard model of optimal growth, interpreted as a model of a market economy with infinitely long-lived agents, does not allow separation of the savings decisions of agents from the investment decisions of firms. Investment is essentially passive: the "one good" assumption leads to a perfectly elastic investment supply; the absence of installation costs for investment leads to a perfectly elastic investment demand. On the other hand, the standard model of temporary equilibrium used in macroeconomics characterizes both the savings-consumption decision and the investment decision, or, equivalently, derives a well-behaved aggregate demand which, in equilibrium, must be equal to aggregate supply. Often, however, we want to study the movement of the temporary equilibrium over time in response to a particular shock or policy. The discrepancy between the treatment of investment in the two models makes imbedding the temporary equilibrium model in the growth model difficult. This paper characterizes the dynamic behavior of the optimal growth model with adjustment costs. It shows the similarity between the temporary equilibrium of the corresponding market economy and the short-run equilibrium of standard macroeconomic models: consumption depends on wealth, investment on Tobin's q. Equilibrium is maintained by the endogenous adjustment of the term structure of interest rates. It then shows how the equivalence can be used to study the dynamic effects of policies; it considers various fiscal policies and exploits their equivalence to technological shifts in the optimal growth problem. ER -