Monetary and Fiscal Policy in a Two-Sector Keynesian Model

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Abstract

There are two current approaches to the treatment of real capital in macroeconomic theory. The first assumes that a homogeneous capital good has a unique price which is determined by the demand and supply for the stock of capital. This view leads to a neoclassical model, where the desired rate of investment is the time rate of change of the desired stock of capital. The one-sector models of Tobin [21, 22], Sidrauski, and Johnson, and the two-sector models of Foley-Sidrauski, Sargent-Henderson, and Park are all based on this view of capital. The second approach assumes that a homogeneous capital good has two separate market prices, one for new output and one for the equity claims on the existing stock. According to this approach, the crucial determinant of desired investment is the difference between the price of equities and the price of new output.l This is the view embodied in the one-sector models of Tobin [23], Brainard-Tobin, Turvey, Smith, and Brunner-Meltzer [5], which have an operational structure similar to the Keynesian models of Hicks and Modigliani.2

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