Notes on an Endogenous Growth Model with two Capital Stocks II: The Stochastic Case
This paper extends the class of stochastic AK growth models with a closed-form solution to the case where there are two capital goods in the model. To be precise, we consider the Uzawa-Lucas model of endogenous growth with human and physical capital. The extension holds, even if an external effect in the use of human capital in goods production occurs. Using the “guess and verify” method, we determine the value function of the social planner in the centralized economy and the value function of the representative agent in the decentralized case. We show that the introduction of income taxes on wages and of a subsidy on physical capital earnings is able to help the decentralized economy in reaching the social optimum, while keeping the policy maker’s budget balanced. Then the time series implications of the model’s solution are derived. In Appendix to the paper the uniqueness of the value functions is proved by using an alternative method.
|Date of creation:||Jun 2005|
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Web page: http://sfb649.wiwi.hu-berlin.de
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- Benhabib Jess & Perli Roberto, 1994. "Uniqueness and Indeterminacy: On the Dynamics of Endogenous Growth," Journal of Economic Theory, Elsevier, vol. 63(1), pages 113-142, June.
- Reiß, Markus & Bethmann, Dirk, 2003.
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SFB 373 Discussion Papers
2003,17, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
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- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
- Bethmann, Dirk, 2002. "Notes on an endogenous growth model with two capital stocks i: The deterministic case," SFB 373 Discussion Papers 2002,65, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
- 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.
- Uhlig, Harald & Yanagawa, Noriyuki, 1996. "Increasing the capital income tax may lead to faster growth," European Economic Review, Elsevier, vol. 40(8), pages 1521-1540, November.
- Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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