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The Under-Estimated Virtues of the Two-Sector AK Model

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  • Gabriel J. FELBERMAYR
  • Omar LICANDRO

Abstract

We show that the two-sector version of the AK model proposed by Rebelo (1991) can be read as an endogenous growth extension of Greenwood, Hercowitz and Krusell (1997). By confining constant returns to capital to the investment goods sector, the model generates endogenously the secular downward trend of the relative price of equipment investment and the rising real investment rate observed in US NIPA data. Whereas Jones (1995) criticizes that the one-sector model fails to reconcile the empirical facts of trending real investment rates and stationary output growth, this incompatibility vanishes in the two-sector version. Finally, a simple technological shock can reproduce the ‘1974’ break in post World War II US data. Thus, AK-type endogenous growth models comply much better with empirical evidence, once they are augmented with a strictly concave consumption sector.
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  • Gabriel J. FELBERMAYR & Omar LICANDRO, 2002. "The Under-Estimated Virtues of the Two-Sector AK Model," Economics Working Papers ECO2002/27, European University Institute.
  • Handle: RePEc:eui:euiwps:eco2002/27
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    References listed on IDEAS

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    1. Masao Ogaki & Carmen M. Reinhart, 1998. "Measuring Intertemporal Substitution: The Role of Durable Goods," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 1078-1098, October.
    2. Charles I. Jones, 1995. "Time Series Tests of Endogenous Growth Models," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 495-525.
    3. Boucekkine, Raouf & del Rio, Fernando & Licandro, Omar, 2005. "Obsolescence and modernization in the growth process," Journal of Development Economics, Elsevier, vol. 77(1), pages 153-171, June.
    4. Salvador Barrios & Eric Strobl, "undated". "Industry Mobility and Concentration in the European Union," Working Papers 2002-19, FEDEA.
    5. Restuccia, Diego & Urrutia, Carlos, 2001. "Relative prices and investment rates," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 93-121, February.
    6. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 1997. "Long-Run Implications of Investment-Specific Technological Change," American Economic Review, American Economic Association, vol. 87(3), pages 342-362, June.
    7. Sharon G. Harrison, 2003. "Returns to Scale and Externalities in the Consumption and Investment Sectors," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 963-976, October.
    8. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
    9. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-357, April.
    10. Dajin Li, 2002. "Is the AK model still alive? The long-run relation between growth and investment re-examined," Canadian Journal of Economics, Canadian Economics Association, vol. 35(1), pages 92-114, February.
    11. Hsieh, Chang-Tai, 2001. "Endogenous growth and obsolescence," Journal of Development Economics, Elsevier, vol. 66(1), pages 153-171, October.
    12. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, May.
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    Cited by:

    1. Gabriel J. Felbermayr, 2007. "Specialization on a technologically stagnant sector need not be bad for growth," Oxford Economic Papers, Oxford University Press, vol. 59(4), pages 682-701, October.
    2. Ejargque, Joao & McKnight, Stephen, 2006. "Can we identify the relative price between consumption and investment?," Economics Discussion Papers 8904, University of Essex, Department of Economics.
    3. Barañano, Ilaski & Romero-Ávila, Diego, 2015. "Long-term growth and persistence with obsolescence," Economic Modelling, Elsevier, vol. 51(C), pages 328-339.
    4. SimÛn Sosvilla Rivero & Oscar Bajo Rubio & Carmen DÌaz Rold·n, "undated". "Sobre la efectividad de la polÌtica regional comunitaria: El caso de Castilla-la Mancha," Studies on the Spanish Economy 178, FEDEA.
    5. Ana Balcao Reis & Joao Ejarque, 2005. "(Relative Price) Lessons from Taking an AK Model to the Data," 2005 Meeting Papers 312, Society for Economic Dynamics.
    6. D'Alessandro, Simone & Salvadori, Neri, 2008. "Pasinetti versus Rebelo: Two different models or just one?," Journal of Economic Behavior & Organization, Elsevier, vol. 65(3-4), pages 547-554, March.
    7. Juan Prieto & Juan Gabriel Rodríguez & Rafael Salas, "undated". "Polarization, Inequality and Tax Reforms," Working Papers 2003-23, FEDEA.

    More about this item

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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