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The Underestimated Virtues of the Two-sector AK Model

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Author Info
Gabriel Felbermayr (University of Tuebingen)
Omar Licandro (European University Institute)

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Abstract

This paper analyzes some unnoticed predictions of the two-sector AK model in line with the recent literature on embodied technical change. Firstly, by confining constant returns to capital to the investment sector, the AK model generates endogenously the secular downward trend of the relative price of equipment investment and the rising real investment rate observed in US NIPA data. Secondly, Jones' (1995) claim that the AK model fails to reconcile the empirical facts of trending real investment rates and stationary output growth vanishes in the two-sector version. Thirdly, consistent with the evidence from cross-country studies, the model predicts a negative relation between GDP per capita and the relative price of equipment. Hence, in spite of its overly simplistic structure, the two-sector AK model provides important intuition on the implications of a trending relative price of equipment investment in endogenous growth environments.

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Publisher Info
Article provided by Berkeley Electronic Press in its journal Contributions to Macroeconomics.

Volume (Year): 5 (2005)
Issue (Month): 1 ()
Pages: 1322-1322
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Handle: RePEc:bep:maccon:v:5:y:2005:i:1:p:1322-1322

Note: oai:bepress:bejm-1322
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Related research
Keywords: AK model embodiment endogenous growth obsolescence productivity slowdown

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Find related papers by JEL classification:
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Raouf Boucekkine & Fernando del Río & Omar Licandro, 2003. "Embodied Technological Change, Learning-by-doing and the Productivity Slowdown," Scandinavian Journal of Economics, Blackwell Publishing, vol. 105(1), pages 87-98, 03. [Downloadable!] (restricted)
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  2. Hsieh, Chang-Tai, 2001. "Endogenous growth and obsolescence," Journal of Development Economics, Elsevier, vol. 66(1), pages 153-171, October. [Downloadable!] (restricted)
  3. Boucekkine, Raouf & Licandro, Omar & Puch, Luis A. & del Rio, Fernando, 2005. "Vintage capital and the dynamics of the AK model," Journal of Economic Theory, Elsevier, vol. 120(1), pages 39-72, January. [Downloadable!] (restricted)
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  4. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April. [Downloadable!] (restricted)
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  5. Karl Whelan, 2001. "A two-sector approach to modeling U.S. NIPA data," Finance and Economics Discussion Series 2001-04, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  6. Omar LICANDRO & Javier RUIZ-CASTILLO & Jorge DURAN, 2001. "The Measurement of Growth under Embodied Technical Change," Economics Working Papers ECO2001/14, European University Institute. [Downloadable!]
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  7. Jones, Charles I, 1995. "Time Series Tests of Endogenous Growth Models," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 495-525, May. [Downloadable!] (restricted)
  8. Masao Ogaki & Carmen M. Reinhart, 1998. "Measuring Intertemporal Substitution: The Role of Durable Goods," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 1078-1098, October. [Downloadable!] (restricted)
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  9. Raouf BOUCEKKINE & Fernando DEL RIO & Omar LICANDRO, 2002. "Obsolescence and Modernization in the Growth Process," Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) Discussion Paper 2002043, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
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  10. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June. [Downloadable!] (restricted)
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  11. Ellen R. McGrattan, 1998. "A defense of AK growth models," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 13-27. [Downloadable!]
  12. Restuccia, Diego & Urrutia, Carlos, 2001. "Relative prices and investment rates," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 93-121, February. [Downloadable!] (restricted)
  13. Sharon G. Harrison, 2003. "Returns to Scale and Externalities in the Consumption and Investment Sectors," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 963-976, October. [Downloadable!] (restricted)
  14. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 1997. "Long-Run Implications of Investment-Specific Technological Change," American Economic Review, American Economic Association, vol. 87(3), pages 342-62, June. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gabriel J. Felbermayr, 2004. "Specialization on a Technologically Stagnant Sector Need Not Be Bad for Growth," Center for European, Governance and Economic Development Research (cege) Discussion Papers 24, Center for European, Governance and Economic Development Research, University of Goettingen (Germany).. [Downloadable!]
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  2. Simón Sosvilla Rivero & Oscar Bajo Rubio & Carmen Díaz Roldán, . "Sobre la efectividad de la política regional comunitaria: El caso de Castilla-la Mancha," Working Papers 2003-25, FEDEA. [Downloadable!]
    Other versions:
  3. Joao Ejarque & Stephen McKnight, 2006. "Can we identify the relative price between consumption and investment?," Economics Discussion Papers 615, University of Essex, Department of Economics. [Downloadable!]
  4. Juan Prieto & Juan Gabriel Rodríguez & Rafael Salas, . "Polarization, Inequality and Tax Reforms," Working Papers 2003-23, FEDEA. [Downloadable!]
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