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Transitional Dynamics in Two-Sector Models of Endogenous Growth

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  • Casey B. Mulligan
  • Xavier Sala-i-Martin

Abstract

We analyze the steady state and transitional dynamics of two-sector models of endogenous growth. The necessary conditions for endogenous growth imply that transitions depend only on a measure of the imbalance between the two sectors such as the ratio of the two capital stocks. We use the Time-Elimination method to analyze the transitional d)niamics. Three main economic forces drive the transition: a Solow effect, a consumption smoothing effect, and a relative wage effect. For plausible parameterizations the consumption smoothing effect tends to dominate the relative wage effect; transition from relatively low levels of physical capital is accomplished through higher work effort rather than higher savings.

Suggested Citation

  • Casey B. Mulligan & Xavier Sala-i-Martin, 1993. "Transitional Dynamics in Two-Sector Models of Endogenous Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 739-773.
  • Handle: RePEc:oup:qjecon:v:108:y:1993:i:3:p:739-773.
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