Do Ak models really lack transitional dynamics?

Yoseph Getachew

No 2012-011, MERIT Working Papers from United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT)

Abstract: Contrary to a popular belief, the most popular Ak growth models display transitional dynamics once the representative agent and complete markets assumptions are overturned. The class of models is identied with diminishing returns at individual but constant returns at aggregate due to externality effects. Under incomplete markets, the former implies that dynasties with a lower levels of initial capital grow faster. This is picked up by the aggregate economy that passes through a long transitional period before it converges to its balanced growth path. During the transition period, aggregate consumption and output grow at the same rate but higher than that of capital.

Keywords: Transitional dynamics; Ak model; inequality dynamics; heterogeneous households; incomplete capital market (search for similar items in EconPapers)
JEL-codes: D30 E47 O42 (search for similar items in EconPapers)
Date: 2012
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