Tuesday, November 26, 2013

Pioneers of the static interest rate

When an author describes his work in the abstract or the introduction, it is common to highlight what is "new," "novel," "unique," an "improvement," or "better." But you do not write that your paper is "pioneering" or "seminal," as this can only be established by others in hindsight.

That does not stop Sarbajit Chaudhuri and Manash Ranjan Gupta, who start their abstract with "This paper makes a pioneering attempt to provide a theory of determination of interest rate in the informal credit market in a less developed economy in terms of a three-sector static deterministic general equilibrium model." OK. So we have a static model to determine the interest rate. That is pioneering. I always thought the interest rate was tied to the relative price of commodities in different periods. I guess the genius here is that with a static model, one needs not to worry about future shocks and even current shocks are instantaneously resolved so the model is also deterministic! This allows to simplify everything to a great extend, but apparently still provides a major improvement of Gupta (1997), that was, however, already pioneering the static determination of the interest rate. So the pioneership of this paper must lie elsewhere. I think the pioneering aspect is rather in the assumption that there is no flow across regional informal markets and moneylenders have a local monopoly. Imagine the pioneering strides we are now making towards a closed-form solution of the model!

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