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Dynamic Analysis of a 'Solow-Romer' Model of Endogenous Growth

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  • Gordon Schmidt
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    Abstract

    The model of endogenous economic growth developed by Paul Romer (1990a) is briefly reviewed and modified by substituting a Solow type consumption function in place of the utility maximising behaviour of consumers. The dynamic system and steady-state growth path of this Solow-Romer model are then derived. Such modification allows the dynamics of the model, in response to certain economic shocks, to be examined in terms of phase diagrams; and illustrates the instructional power of this approach. The impacts of the same economic shocks are also analysed more directly by numerical integration of the differential equations and boundary conditions describing the dynamic system of the model. Adjustment processes are found to be relatively lengthy; and to be characterised by significant initial jumps or discontinuities in certain variables. Furthermore, in some cases these initial jumps can be in the opposite direction to that of the subsequent adjustment. Such results emphasise the importance of explicit analysis of the dynamics of the adjustment paths of growth models and their relevance for economic policy.

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    Bibliographic Info

    Paper provided by Victoria University, Centre of Policy Studies/IMPACT Centre in its series Centre of Policy Studies/IMPACT Centre Working Papers with number ip-68.

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    Date of creation: Aug 1997
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    Handle: RePEc:cop:wpaper:ip-68

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    1. Paul Romer, 1989. "Endogenous Technological Change," NBER Working Papers 3210, National Bureau of Economic Research, Inc.
    2. Paul Romer, 1990. "Are Nonconvexities Important For Understanding Growth?," NBER Working Papers 3271, National Bureau of Economic Research, Inc.
    3. Casey B. Mulligan & Xavier Sala-i-Martin, 1991. "A Note on the Time-Elimination Method For Solving Recursive Dynamic Economic Models," NBER Technical Working Papers 0116, National Bureau of Economic Research, Inc.
    4. Romer, Paul M, 1987. "Growth Based on Increasing Returns Due to Specialization," American Economic Review, American Economic Association, vol. 77(2), pages 56-62, May.
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    Cited by:
    1. Zaman, Gheorghe & Goschin, Zizi, 2010. "Technical Change as Exogenous or Endogenous Factor in the Production Function Models. Empirical Evidence from Romania," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 29-45, July.

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