Description:
<jats:p>The behavior of the real interest rate in a general equilibrium
multisector model with irreversible investment is examined. It is
shown that in such a model purely sectoral shocks can lead to
substantial variation in the real interest rate and other aggregate
time series. A source of variation in aggregate time series
that is not found in one-sector models is thus examined, and the
implications of this source of variation for the behavior of the
interest rate are highlighted. Such a model seems to better capture the
relationship among the real interest and output or investment than
the standard one-sector stochastic growth model. It is also shown
that, because of a desire to smooth consumption, with irreversible
investment a rise in uncertainty concerning the future return to
capital tends to lead to <jats:italic>more</jats:italic> current investment and a lower
real interest rate.</jats:p>