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The Behaviour of the Saving Rate in the Neoclassical Optimal Growth Model

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Abstract

This paper characterizes analytically the saving rate in the Ramsey-Cass-Koopmans model with a general production function when there exists both exogenous and endogenous growth. It points out conditions involving the share of capital and the elasticities of factor and intertemporal substitution under which the saving rate path to its steady-state value exhibits overshooting, undershooting, or is monotonic. Simulations illustrate these interesting dynamics. The paper also identifies the general class of production functions that render the saving rate constant along the entire transition path and hence make the Ramsey-Cass-Koopmans model isomorphic to that of Solow-Swan.

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Bibliographic Info

Paper provided by Department of Economics, University of Macedonia in its series Discussion Paper Series with number 2008_05.

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Date of creation: Jun 2008
Date of revision: Jun 2008
Handle: RePEc:mcd:mcddps:2008_05

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Web page: http://www.uom.gr/index.php?tmima=3

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Keywords: The Ramsey-Cass-Koopmans model; Saving rate; Elasticities of Substitution;

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References

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  1. Jones, Larry E. & Manuelli, Rodolfo E., 2005. "Neoclassical Models of Endogenous Growth: The Effects of Fiscal Policy, Innovation and Fluctuations," Handbook of Economic Growth, Elsevier, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 1, pages 13-65 Elsevier.
  2. Brunner, Martin & Strulik, Holger, 2002. "Solution of perfect foresight saddlepoint problems: a simple method and applications," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 26(5), pages 737-753, May.
  3. Rainer Klump & Peter McAdam & Alpo Willman, 2004. "Factor Substitution and Factor Augmenting Technical Progress in the US: A Normalized Supply-Side System Approach," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c009_030, DEGIT, Dynamics, Economic Growth, and International Trade.
  4. Litina, Anastasia & Palivos, Theodore, 2008. "Do Inada conditions imply that production function must be asymptotically Cobb-Douglas? A comment," Economics Letters, Elsevier, Elsevier, vol. 99(3), pages 498-499, June.
  5. Norman Loayza & Klaus Schmidt-Hebbel & Luis Servén, 2000. "Saving in Developing Countries: An Overview," World Bank Economic Review, World Bank Group, World Bank Group, vol. 14(3), pages 393-414, September.
  6. Winford H. Masanjala & Chris Papageorgiou, 2004. "The Solow model with CES technology: nonlinearities and parameter heterogeneity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 19(2), pages 171-201.
  7. Maddison, A., 1991. "A Long Run Perspective on Saving," Papers, Groningen State, Institute of Economic Research- 443, Groningen State, Institute of Economic Research-.
  8. Turnovsky, Stephen J., 2008. "The role of factor substitution in the theory of economic growth and income distribution: Two examples," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(2), pages 604-629, June.
  9. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, Springer, vol. 5(1), pages 87-120, March.
  10. Olivier de La Grandville & Rainer Klump, 2000. "Economic Growth and the Elasticity of Substitution: Two Theorems and Some Suggestions," American Economic Review, American Economic Association, American Economic Association, vol. 90(1), pages 282-291, March.
  11. Klump, Rainer & Preissler, Harald, 2000. " CES Production Functions and Economic Growth," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 102(1), pages 41-56, March.
  12. Theodore Palivos & Giannis Karagiannis, 2007. "The elasticity of substitution as an engine of growth," Discussion Paper Series, Department of Economics, University of Macedonia 2007_03, Department of Economics, University of Macedonia, revised Dec 2007.
  13. Lawrence J. Christiano, 1989. "Understanding Japan's saving rate: the reconstruction hypothesis," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Spr, pages 10-25.
  14. Barelli, Paulo & Pessoa, Samuel de Abreu, 2003. "Inada conditions imply that production function must be asymptotically Cobb-Douglas," Economics Working Papers (Ensaios Economicos da EPGE) 477, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  15. Nishimura, Kazuo & Venditti, Alain, 2004. "Indeterminacy And The Role Of Factor Substitutability," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 8(04), pages 436-465, September.
  16. Jones, Larry E & Manuelli, Rodolfo E, 1990. "A Convex Model of Equilibrium Growth: Theory and Policy Implications," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(5), pages 1008-38, October.
  17. Barelli, Paulo & de Abreu Pessoa, Samuel, 2003. "Inada conditions imply that production function must be asymptotically Cobb-Douglas," Economics Letters, Elsevier, Elsevier, vol. 81(3), pages 361-363, December.
  18. Turnovsky, Stephen J., 2002. "Intertemporal and intratemporal substitution, and the speed of convergence in the neoclassical growth model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 26(9-10), pages 1765-1785, August.
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Cited by:
  1. Y. Hossein Farzin & Ronald Wendner, 2013. "Saving Rate Dynamics in the Neoclassical Growth Model – Hyperbolic Discounting and Observational Equivalence," Working Papers, Fondazione Eni Enrico Mattei 2013.42, Fondazione Eni Enrico Mattei.
  2. Theodore Palivos & Jianpo Xue & Chong K. Yip, 2011. "Illegal Immigration, Factor Substitution and Economic Growth," Discussion Paper Series, Department of Economics, University of Macedonia 2011_10, Department of Economics, University of Macedonia, revised Jun 2011.

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