A NOTE ON THE STABILITY OF FULLY ENDOGENOUS GROWTH WITH INCREASING RETURNS AND EXHAUSTIBLE RESOURCES

Francisco Cabo, Guiomar Martin-Herran and María Pilar Martínez-García

Macroeconomic Dynamics, 2016, vol. 20, issue 3, 819-831

Abstract: We analyze a general R&D-based endogenous growth model with a growth-essential natural resource. The economy comprises two separate sectors, final output and R&D, both directly or indirectly dependent on the natural resource. Because the resource is exhaustible and it is an essential productive input, increasing returns to scale to manmade inputs are compatible with nonexplosive sustained growth. The instability problem usually associated with increasing returns is overcome thanks to the existence of imperfect markets in a decentralized economy. We find an admissible range of values for the elasticity of capital in the R&D sector under which growth is fully endogenous and saddlepath stable, with no need of exogenous population growth.

Date: 2016
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