Dynamic equations
Using the fact that actual borrowing by entrepreneurs, that must be repaid at interest rate rt+1, is equal to the difference between actual investment and their initial wealth Wf, we can proceed to describing the dynamic evolution of the economy.
This dynamics is fully described by the state variables Wf and Wf, and as we will now show, it boils down to a single dynamic equation in the one state variable
[I] This growth rate is also equal to the product of the savings rate (1 - α) and of the output/capital ratio σ.
wealth Wβ and (lending) workers' wealth Wl between periods (t + 1) and (t + 2), are given by:
realize the rate of return σ2 on their entire wealth, both by lending a fraction of it (at rate σ2) to entrepreneurs and by investing the remaining fraction on their home activity at the same rate.
3.4
Source:
Aghion P., Banerjee A.. Volatility and Growth. Oxford, Oxford University Press,2005. - 159p.. 2005
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