Divergence in Economic Performance: Transitional Dynamics with Multiple Equilibria
Special pairs of the utility functions and the production functions are used in this paper to uncover the transitional dynamics in a Lucas model of growth. The main findings are as follows: A continuum of equilibria exists if the external effect of human capital in goods production is sufficiently large. The process of lagging behind, catching up with, and overtaking that we often observe in the world economy can be explained. Finally, some equilibrium paths are shown to have such complicated patterns that the dynamics conjectured by Lucas are too simple to be correct.
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