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The (Interesting) Dynamic Properties of the Neoclassical Growth Model with CES Production

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  • Kent Smetters

    (University of Pennsylvania)

Abstract

Despite being the standard growth model for several decades, little is actually known analytically about the dynamic properties of the neoclassical Ramsey-Cass-Koopmans growth model. This papers derives analytically the properties of the endogenous savings rate when technology takes the Constant Elesticity of Substitution (CES) form. For a factor substitution elasticity between capital and labor less than unity, the saving rate decreases along the transition path after the capital stock reaches a critical value identified analytically herein. But before reaching this critical value, the saving rate might increase and so, taken as a whole, the saving rate path might manifest 'overshooting.' Similarly, for a factor substitution elasticity greater than unity, the saving rate increases along the transistion path after the capital stock reaches a critical value. Before reaching this critical value, the saving rate might decrease and the saving rate path might manifest 'undershooting.' A simulation illustrating these interesting dynamics is presented. (Copyright: Elsevier)

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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 6 (2003)
Issue (Month): 3 (July)
Pages: 697-707

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Handle: RePEc:red:issued:v:6:y:2003:i:3:p:697-707

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Keywords: The Ramsey-Cass-Koopmans model; saving; CES production;

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  1. Mulligan, C.B. & Sala-i-Martin, X., 1992. "Transitional Dynamics in Two-Sector Models of Endogenous Growth," Papers, Yale - Economic Growth Center 651, Yale - Economic Growth Center.
  2. Tjalling C. Koopmans, 1963. "On the Concept of Optimal Economic Growth," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 163, Cowles Foundation for Research in Economics, Yale University.
  3. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
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Cited by:
  1. Huikang Ying, 2014. "Growth and Structural Change in a Dynamic Lagakos-Waugh Model," Bristol Economics Discussion Papers 14/639, Department of Economics, University of Bristol, UK.
  2. Alberto Bucci & Chiara Del Bo, 2012. "On the interaction between public and private capital in economic growth," Journal of Economics, Springer, Springer, vol. 106(2), pages 133-152, June.
  3. Debdulal Mallick, 2007. "Growth and Slowdown of Nations: What Role for the Elasticity of Substitution?," Economics Series 2007_02, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  4. Gómez, Manuel A., 2008. "Dynamics Of The Saving Rate In The Neoclassical Growth Model With Ces Production," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 12(02), pages 195-210, April.
  5. Voß, Achim & Lingens, Jörg, 2014. "What's the damage? Environmental regulation with policy-motivated bureaucrats," CAWM Discussion Papers, Center of Applied Economic Research Münster (CAWM), University of Münster 67, Center of Applied Economic Research Münster (CAWM), University of Münster.
  6. Y. Hossein Farzin & Ronald Wendner, 2013. "Saving Rate Dynamics in the Neoclassical Growth Model — Hyperbolic Discounting and Observational Equivalence," Graz Economics Papers, University of Graz, Department of Economics 2013-05, University of Graz, Department of Economics.
  7. Y. Hossein Farzin & Ronald Wendner, 2014. "The Time Path of the Saving Rate: Hyperbolic Discounting and Short-Term Planning," Graz Economics Papers, University of Graz, Department of Economics 2014-04, University of Graz, Department of Economics.
  8. Jang-Ting Guo & Kevin J. Lansing, 2008. "Capital-Labor Substitution, Equilibrium Indeterminacy, and the Cyclical Behavior of Labor Income," Working Papers, University of California at Riverside, Department of Economics 200804, University of California at Riverside, Department of Economics, revised Apr 2008.
  9. Francisco Alvarez-Cuadrado, 2006. "Growth Outside The Stable Path: Lessons From The European Reconstruction," Departmental Working Papers, McGill University, Department of Economics 2006-02, McGill University, Department of Economics.
  10. Y. Hossein Farzin & Ronald Wendner, 2014. "The Time Path of the Saving Rate: Hyperbolic Discounting and Short-Term Planning," Working Papers, Fondazione Eni Enrico Mattei 2014.63, Fondazione Eni Enrico Mattei.
  11. Yongsung Chang & Andreas Hornstein, 2011. "Transition dynamics in the neoclassical growth model : the case of South Korea," Working Paper, Federal Reserve Bank of Richmond 11-04, Federal Reserve Bank of Richmond.
  12. Guo, Jang-Ting & Lansing, Kevin J., 2009. "Capital-labor substitution and equilibrium indeterminacy," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 33(12), pages 1991-2000, December.

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