On the Invariance of the Rate of Return to Convex Adjustment Costs

NBER Working Paper No. 8649^*
Issued in December 2001
NBER Program(s): AP EFG

---- Abstract -----

The Modified Golden Rule, which relates the rate of return on capital and the growth rate of the capital stock along long-run growth paths that maximize the utility of a representative infinitely-lived consumer, is invariant to the introduction of convex capital adjustment costs. Therefore, along balanced growth paths in neoclassical optimal growth models with an exogenous long-run growth rate of capital, the rate of return is invariant to the introduction of convex adjustment costs, though the capital-labor ratio is reduced along such paths. In AK models, convex adjustment costs reduce the growth rate and rate of return on capital.

^*Published: Abel, Andrew B. "On The Invariance Of The Rate Of Return To Convex Adjustment Costs," Review of Economic Dynamics, 2002, v5(3,Jul), 586-601.

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