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The underestimated virtues of the two-sector AK model

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We show that the two-sector version of the AK model proposed by Rebelo (1991) can be read as an endogenous growth extension of Greenwood, Hercowitz and Krusell (1997). By confining constant returns to capital to the investment goods sector, the 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. Whereas Jones (1995) criticizes that the one-sector model fails to reconcile the empirical facts of trending real investment rates and stationary output growth, this incompatibility vanishes in the two-sector version. Finally, a simple technological shock can reproduce the ‘1974’ break in post World War II US data. Thus, AK-type endogenous growth models comply much better with empirical evidence, once they are augmented with a strictly concave consumption sector.

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Paper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2003-15.

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Date of creation: Dec 2003
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Handle: RePEc:jku:econwp:2003_15

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Keywords: AK model; embodiment; endogenous growth; obsolescence; ‘1974’;

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  1. Restuccia, Diego & Urrutia, Carlos, 2001. "Relative prices and investment rates," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 93-121, February.
  2. Ogaki, M & Reinhart, C-M, 1995. "Measuring Intertemporal Substitution : The Role of Durable Goods," RCER Working Papers 404, University of Rochester - Center for Economic Research (RCER).
  3. 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.
  4. 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.
  5. Sergio T. Rebelo, 1992. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  6. Robert E. Hall, 1988. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  7. Hsieh, Chang-Tai, 2001. "Endogenous growth and obsolescence," Journal of Development Economics, Elsevier, vol. 66(1), pages 153-171, October.
  8. 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.
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Cited by:
  1. Ana Balcao Reis & Joao Ejarque, 2005. "(Relative Price) Lessons from Taking an AK Model to the Data," 2005 Meeting Papers 312, Society for Economic Dynamics.
  2. Gabriel Felbermayr, 2004. "Specialization on a technologically atagnant aector need not be bad for growth," Economics working papers 2004-02, Department of Economics, Johannes Kepler University Linz, Austria.
  3. D'Alessandro, Simone & Salvadori, Neri, 2008. "Pasinetti versus Rebelo: Two different models or just one?," Journal of Economic Behavior & Organization, Elsevier, vol. 65(3-4), pages 547-554, March.
  4. Jorge Durán & Omar Licandro, 2012. "Is the GDP Growth Rate in NIPA a Welfare Measure?," Working Papers 665, Barcelona Graduate School of Economics.
  5. 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.
  6. Juan Prieto & Juan Gabriel Rodríguez & Rafael Salas, . "Polarization, Inequality and Tax Reforms," Working Papers 2003-23, FEDEA.

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