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Factor substitution, long-run equilibrium, and convergence speed in the Lucas model

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  • Gómez, Manuel A.

Abstract

We study the effect of factor substitution on long-run equilibrium in the Lucas model with CES production. The long-run growth rate does not depend on the elasticity of substitution. However, there is a negative (positive) relationship between the elasticity of factor substitution and the convergence speed if the baseline ratio of physical capital to effective labor is below (above) its steady-state value.

Suggested Citation

  • Gómez, Manuel A., 2023. "Factor substitution, long-run equilibrium, and convergence speed in the Lucas model," Economics Letters, Elsevier, vol. 232(C).
    • Handle: RePEc:eee:ecolet:v:232:y:2023:i:c:s016517652300383x
    DOI: 10.1016/j.econlet.2023.111358
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    More about this item

    Keywords

    Elasticity of substitution; Endogenous growth; Convergence speed; Human capital;
    All these keywords.

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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