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Do Ak models really lack transitional dynamics?

  • Yoseph Yilma Getachew

    ()

    (Durham Business School)

Contrary to a popular belief, the most popular Ak growth models display transitional dynamics once the representative agent and complete markets assumptions are overturned. The class of models is identified with diminishing-returns at individual but constant-returns at aggregate due to externality effects. Under incomplete markets, the former implies that dynasties with a lower levels of initial capital grow faster. This is picked up by the aggregate economy that passes through a long transitional period before it converges to its balanced growth path. During the transition period, aggregate consumption and output grow at the same rate but higher than that of capital.

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Paper provided by Durham University Business School in its series Working Papers with number 2012_01.

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Date of creation: 06 Feb 2012
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Handle: RePEc:dur:durham:2012_01
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