Research Discussion Paper – RDP 7501 The Supply Price of Capital: An Empirical Reformulation and Some Points of Clarification


Despite the relative simplicity of the supply price of capital as a concept, the analytical literature dealing with its measurement and explanation is surprisingly complex. For this reason the objectives of this paper are twofold: firstly, to present a reformulation of those equations in RBA11 used to derive the supply price of capital, and secondly, to isolate; certain issues regarded by the authors as inadequately covered in the literature. As such, the paper is directed essentially at the reader who is interested in acquiring a basic understanding of the field. With this end in mind, Sections 1 and 2 examine in depth the theoretical concept of the supply price of capital, its role in economic analysis, its limitations and the problems faced in constructing a statistical series to represent it. Section 3 presents the proposed approach to a behavioural explanation of its movements. Section 4 reports and evaluates the estimated results and Section 5 provides some concluding observations.