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The (Interesting) Dynamic Properties of the Neoclassical Growth Model with CES Production

  • Kent Smetters

Despite being the standard growth model for several decades, little is actually known analytically about the dynamic properties of the neoclassical Ramsey-Cass-Koopmans growth model. This paper derives analytically the properties of the endogenous saving rate when technology takes the Constant Elasticity of Substitution (CES) form. For a factor substitution elasticity between capital and labor less than unity, the saving rate decreases along the transition path after the capital stock reaches a critical value identified analytically herein. But before reaching this critical value, the saving rate might increase and so, taken as a whole, the saving rate path might manifest overshooting.' Similarly, for a factor substitution elasticity greater than unity, the saving rate increases along the transition path after the capital stock reaches a critical value. Before reaching this critical value, the saving rate might decrease and so the saving rate path might manifest undershooting.' A simulation illustrating these interesting dynamics is presented.

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File URL: http://www.nber.org/papers/t0290.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0290.

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Date of creation: Mar 2003
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Publication status: published as Smetters, Kent. "The (Interesting) Dynamic Properties Of The Neoclassical Growth Model With CES Production," Review of Economic Dynamics, 2003, v6(2,Apr), 697-707.
Handle: RePEc:nbr:nberte:0290
Note: TWP
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  1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  2. Mulligan, C.B. & Sala-i-Martin, X., 1992. "Transitional Dynamics in Two-Sector Models of Endogenous Growth," Papers 651, Yale - Economic Growth Center.
  3. Tjalling C. Koopmans, 1963. "On the Concept of Optimal Economic Growth," Cowles Foundation Discussion Papers 163, Cowles Foundation for Research in Economics, Yale University.
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