TITLE:
Interest and Growth
AUTHORS:
Andrew P. Leung
KEYWORDS:
Overlapping Generations, Efficiency, Demographic Structure
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.11 No.2,
May
20,
2021
ABSTRACT: This paper considers the relationship between population growth and capital accumulation. In general, the relationship is not monotonic; there is a tension between two opposing effects: a higher growth rate diluting capital that has already been accumulated, and the ability of a growing population to generate its own wealth. The strengths of these effects depend on the population structure and the time horizon for each generation to accumulate wealth. This type of analysis has been conducted within a natural Overlapping Generations framework. However, an explicit assumption is needed to allow a comparatively static analysis of levels of population growth and capital accumulation. That assumption is effectively the requirement for each generation to be self supporting in terms of its consumption and contribution to production. We show that this assumption can be justified in theory by a form of economic efficiency with respect to population changes, referred to as demographic efficiency. This analysis is also conducted within the Overlapping Generations model of modern economics. An interesting aspect is the structure of “steady state” economies, that is where each consumer is identical to any other through time. With simple examples and assumptions, this paper demonstrates that a given interest rate can support more than one population growth rate (unlike Samuelson’s golden rule, where these rates are equal). The ramifications for non steady state economies are accordingly more complex