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The Two Sector Endogenous Growth Model: An Atlas

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Author Info
Michael Ben-Gad () (Department of Economics, City University, London)
Abstract

In this paper we investigate the underlying structure of the Lucas (1988) endogenous growth model. We derive analytically, the restrictions on the parameter space that are necessary and sufficient for the existence of balanced growth paths and saddle-path stable local dynamics. We demonstrate that in contrast to the original model, with the addition of an external effect and depreciation in the human capital sector, the Lucas model can be made consistent with the high degrees of intertemporal elasticities of substitution increasingly estimated in the empirical literature---even if there is a significant degree of increasing returns to scale in the physical production sector of the economy. Finally we demonstrate that for a given baseline rate of steady state growth, with the inclusion of modest degrees of depreciation and external effects to the human capital production process, the model can accommodate the widest possible range of economies---including those characterized by low discount factors, high elasticities of intertemporal substitution, increasing returns in the final goods sector, and also both the high rates of population growth and steady state per-capita output growth we observe in many parts of the world today.

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Paper provided by Department of Economics, City University, London in its series City University Economics Discussion Papers with number 09/02.

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Length: 28 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:cty:dpaper:0902

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Related research
Keywords: Two-Sector Endogenous Growth Model; Intertemporal Elasticity of Substitution; Necessary and Sufficient Conditions;

Find related papers by JEL classification:
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
D62 - Microeconomics - - Welfare Economics - - - Externalities

This paper has been announced in the following NEP Reports:

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