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The Two Sector Endogenous Growth Model and the Intertemporal Elasticity of Substitution: An Atlas

  • Michael Ben-Gad

    (City University London)

We extend the Lucas (1988) endogenous growth model to include sector-specific external effects and depreciation in both sectors. We derive analytically, the restrictions on the parameter space that are necessary and sufficient for the existence of balanced growth paths and equilibria. We demonstrate that in contrast to the original model, with the addition of an external effect and depreciation in the production the human capital sector, the Lucas model can be made consistent with the high degrees of intertemporal elasticities of substitution increasingly estimated in the empirical literature. Finally, we offer empirical evidence using Canadian and U.S. data suggesting that the intertemporal elasticity of substitution may be higher than conventionally assumed.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 512.

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Date of creation: 2008
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Handle: RePEc:red:sed008:512
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  15. 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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  18. Ben-Gad, Michael, 2003. "Fiscal policy and indeterminacy in models of endogenous growth," Journal of Economic Theory, Elsevier, vol. 108(2), pages 322-344, February.
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