The real rate of interest: A theoretical analysis

A theoretical view of the real rate of interest, such as is provided by mod els of economic growth, is presented. That question is of compelling intere st, even though the issues are so long-term as to be of little practical im portance. Models reviewed include the Solow model, and its disaggregated ex tension by Stiglitz; endogenous growth models; the Ramsey model; and the Di amond capital model. All these models are less than fully adequate to answe r key questions. Solow-type models are good at demonstrating the influence of grand changes, such as alterations in saving rates, or demographic chang es. However key variables particularly the saving rate-are treated as const ants. The Ramsey model, on the other hand assumes in effect that a major in fluence on the real rate is a given impatience parameter: The Diamond model is ideal for economies dominated by pension fund saving, but does not desc ribe any actual economy.