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Optimal investment in immobile human capital in an economic and monetary union

Optimal investment in immobile human capital in an economic and monetary union We analyse the optimal accumulation of physical and human capital in a small economy in monetary union. We derive the modified golden rule, which states that the optimal rates of investment in physical and human capital depend upon the natural rate of growth and the real interest rate. If they are equal, there exist infinitely many optimal pairs of investment rates. However, if they differ, the golden rule recommends one of two extreme solutions. Optimal investment rates are always linked together by a very simple linear equation (the line H). The economy should always stay on the line H, and move along this line, either up or down, in response to changes in exogenous parameters. These results are illustrated with numerical experiments, based on realistic values of exogenous parameters. Simulations suggest that current levels of investment in human capital in small European countries are way too low. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Computational Economics and Econometrics Inderscience Publishers

Optimal investment in immobile human capital in an economic and monetary union

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References (6)

Publisher
Inderscience Publishers
Copyright
Copyright © Inderscience Enterprises Ltd. All rights reserved
ISSN
1757-1170
eISSN
1757-1189
DOI
10.1504/IJCEE.2009.029255
Publisher site
See Article on Publisher Site

Abstract

We analyse the optimal accumulation of physical and human capital in a small economy in monetary union. We derive the modified golden rule, which states that the optimal rates of investment in physical and human capital depend upon the natural rate of growth and the real interest rate. If they are equal, there exist infinitely many optimal pairs of investment rates. However, if they differ, the golden rule recommends one of two extreme solutions. Optimal investment rates are always linked together by a very simple linear equation (the line H). The economy should always stay on the line H, and move along this line, either up or down, in response to changes in exogenous parameters. These results are illustrated with numerical experiments, based on realistic values of exogenous parameters. Simulations suggest that current levels of investment in human capital in small European countries are way too low.

Journal

International Journal of Computational Economics and EconometricsInderscience Publishers

Published: Jan 1, 2009

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