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The underestimated virtues of the two-sector AK model

Gabriel Felbermayr () and Omar Licandro ()

No 2003-15, Economics working papers from Department of Economics, Johannes Kepler University Linz, Austria

Abstract: We show that the two-sector version of the AK model proposed by Rebelo (1991) can be read as an endogenous growth extension of Greenwood, Hercowitz and Krusell (1997). By confining constant returns to capital to the investment goods sector, the model generates endogenously the secular downward trend of the relative price of equipment investment and the rising real investment rate observed in US NIPA data. Whereas Jones (1995) criticizes that the one-sector model fails to reconcile the empirical facts of trending real investment rates and stationary output growth, this incompatibility vanishes in the two-sector version. Finally, a simple technological shock can reproduce the ‘1974’ break in post World War II US data. Thus, AK-type endogenous growth models comply much better with empirical evidence, once they are augmented with a strictly concave consumption sector.

Keywords: AK model; embodiment; endogenous growth; obsolescence; ‘1974’ (search for similar items in EconPapers)
JEL-codes: O41 O30 (search for similar items in EconPapers)
Date: 2003-12
New Economics Papers: this item is included in nep-dev and nep-dge
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Related works:
Journal Article: The Underestimated Virtues of the Two-sector AK Model (2005) Downloads
Working Paper: The Under-Estimated Virtues of the Two-Sector AK Model (2002) Downloads
Working Paper: The underestimated virtues of the two-sector AK model Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:jku:econwp:2003_15

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