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The Two Sector Endogenous Growth Model and the Intertemporal Elasticity of Substitution: An Atlas

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  • Michael Ben-Gad

    (City University London)

Abstract

We extend the Lucas (1988) endogenous growth model to include sector-specific external effects and depreciation in both sectors. We derive analytically, the restrictions on the parameter space that are necessary and sufficient for the existence of balanced growth paths and equilibria. We demonstrate that in contrast to the original model, with the addition of an external effect and depreciation in the production 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. Finally, we offer empirical evidence using Canadian and U.S. data suggesting that the intertemporal elasticity of substitution may be higher than conventionally assumed.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 512.

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Date of creation: 2008
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Handle: RePEc:red:sed008:512

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  1. Shigeyuki Hamori, 1996. "Consumption growth and the intertemporal elasticity of substitution: some evidence from income quintile groups in Japan," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 3(8), pages 529-532.
  2. Ben-Gad, Michael, 2003. "Fiscal policy and indeterminacy in models of endogenous growth," Journal of Economic Theory, Elsevier, Elsevier, vol. 108(2), pages 322-344, February.
  3. Benhabib, Jess & Jovanovic, Boyan, 1991. "Externalities and Growth Accounting," American Economic Review, American Economic Association, American Economic Association, vol. 81(1), pages 82-113, March.
  4. Xie Danyang, 1994. "Divergence in Economic Performance: Transitional Dynamics with Multiple Equilibria," Journal of Economic Theory, Elsevier, Elsevier, vol. 63(1), pages 97-112, June.
  5. Annette Vissing-J´┐Żrgensen & Orazio P. Attanasio, 2003. "Stock-Market Participation, Intertemporal Substitution, and Risk-Aversion," American Economic Review, American Economic Association, American Economic Association, vol. 93(2), pages 383-391, May.
  6. Ravi Bansal & Amir Yaron, 2000. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," NBER Working Papers 8059, National Bureau of Economic Research, Inc.
  7. Barro, Robert J & Becker, Gary S, 1989. "Fertility Choice in a Model of Economic Growth," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 481-501, March.
  8. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1269-86, September.
  9. Robert E. Hall, 1986. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
  10. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, Elsevier, vol. 22(1), pages 3-42, July.
  11. Masasaki Fuse, 2004. "Estimating intertemporal substitution in Japan," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 11(4), pages 267-269.
  12. Gary S. Becker & Robert J. Barro, 1986. "A Reformulation of the Economic Theory of Fertility," NBER Working Papers 1793, National Bureau of Economic Research, Inc.
  13. Jonathan Gruber, 2006. "A Tax-Based Estimate of the Elasticity of Intertemporal Substitution," NBER Working Papers 11945, National Bureau of Economic Research, Inc.
  14. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, Springer, vol. 5(4), pages 297-323, October.
  15. Attanasio, Orazio P & Weber, Guglielmo, 1989. "Intertemporal Substitution, Risk Aversion and the Euler Equation for Consumption," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 99(395), pages 59-73, Supplemen.
  16. Robert A. Amano & Tony S. Wirjanto, 1997. "Intratemporal Substitution And Government Spending," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 605-609, November.
  17. Caballe, Jordi & Santos, Manuel S, 1993. "On Endogenous Growth with Physical and Human Capital," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(6), pages 1042-67, December.
  18. Donald S. Siegel & Catherine J. Morrison Paul, 1999. "Scale Economies and Industry Agglomeration Externalities: A Dynamic Cost Function Approach," American Economic Review, American Economic Association, American Economic Association, vol. 89(1), pages 272-290, March.
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