Neoclassical production theory and growth with unemployment: The stability issue revisited
A common belief in economic growth theory is that the instability of the balanced growth path of models based on a non-neoclassical production theory, such as the Harrod-Domar or Goodwin-type models, may be removed by introducing neoclassical technology and substitutability between factors. This does not need to be true. As shown in this paper, Solow-type models with sluggishly adjusting, non-market-clearing, real wages and endogenous fertility may suffer instability. Not only: instability may be favoured by too strong a degree of neoclassical substitution in the economy.
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