Real Interest Rates, Real Wages and Economic Restructuring—Analysis Based on Dynamic Stochastic General Equilibrium

Jin Zhongxia

Institute of Financial Research, the People’s Bank of China (PBoC), Beijing, China

Abstract:  On the basis of research conducted by Long and Plosser (1983), this paper carries out an in-depth analysis on the relationship between real interest rates, real wage, and macro-economy and economic structure by simulating a dynamic stochastic general equilibrium (DSGE) model and comes to the following conclusions: (1) Increasing the level of real interest rates will expand the share of consumption in GDP, improve the macroeconomic structure, and promote steadyeconomic development; (2) Increasing the level of real wages will enhance economic growth but will not change the economic structure of consumption and investments; (3) Increasing wages will enhance economic growth and expand its share in national income; (4) Increasing wages will not lower output level but will be favorable to the improvement of economic structure. Therefore, this paper argues for interest rates liberalization to achieve long-term, steady economic development in China.
Keywords: interest rate, real wage, consumption, investment, economic structure

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