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Solving optimal growth models with vintage capital: The dynamic programming approach

Author

Listed:
  • Giorgio Fabbri

    (Dipartimento di Scienze Economiche ed Aziendali - LUISS - Libera Università Internazionale degli Studi Sociali Guido Carli [Roma])

  • Fausto Gozzi

    (Dipartimento di Scienze Economiche e Aziendali - LUISS - Libera Università Internazionale degli Studi Sociali Guido Carli [Roma])

Abstract

This paper deals with an endogenous growth model with vintage capital and, more precisely, with the AK model proposed in [R. Boucekkine, O. Licandro, L.A. Puch, F. del Rio, Vintage capital and the dynamics of the AK model, J. Econ. Theory 120 (1) (2005) 39–72]. In endogenous growth models the introduction of vintage capital allows to explain some growth facts but strongly increases the mathematical difficulties. So far, in this approach, the model is studied by the Maximum Principle; here we develop the Dynamic Programming approach to the same problem by obtaining sharper results and we provide more insight about the economic implications of the model. We explicitly find the value function, the closed loop formula that relates capital and investment, the optimal consumption paths and the long run equilibrium. The short run fluctuations of capital and investment and the relations with the standard AK model are analyzed. Finally the applicability to other models is also discussed.

Suggested Citation

  • Giorgio Fabbri & Fausto Gozzi, 2008. "Solving optimal growth models with vintage capital: The dynamic programming approach," Post-Print hal-01615446, HAL.
    • Handle: RePEc:hal:journl:hal-01615446
    DOI: 10.1016/j.jet.2008.03.008
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