The Effect of an Uncertain Capital Return on Economic Growth; a Case Study of Iran

The internal saving in a country، is the most important source for financing and economic growth. These savings are confronted with risk of a volatile rate of return to capital. The uncertainty in the rate of return on capital may lead to distorted economic decisions by the savers، consumers and investors. Depending on the pattern of these behaviors we may observe deviations in the rate of economic growth. This study attempts to estimate the rate of economic growth with uncertainty in the rate of return on capital using standard Brownian motion and the optimized random control to compare it with the planned rate of economic growth. The findings indicate that; if the risk-aversion coefficient is less than one، the average long-term rate of economic growth will be less than the planned growth rate. Further، using the data on Iranian economy for the period 1974-2011، first، a dynamic model، based on SDE، was simulated for GDP by rate of growth %3. 85، then، the relationship between capital return volatility (using the EGARCH model) and the rate of economic growth was analyzed. The results are indicative of a negative relationship between growth rate and the fluctuations in the rate of return on capital.