Transitional Dynamics in the Uzawa-Lucas Model of Endogenous Growth

Markus Reiß and Dirk Bethmann

No 2003,17, SFB 373 Discussion Papers from Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes

Abstract: We introduce an easy way of analyzing the transitional dynamics of the Uzawa-Lucas endogenous growth model. We use the value function approach to solve both the social planner?s optimization problem and the representative agent?s optimization problem in the decentralized economy. The complexity of the Hamilton-Jacobi-Bellman equation is significantly reduced to a one-dimensional initial value problem for an ordinary differential equation. This approach allows us to find the optimal controls for the non-concave Hamiltonian in the centralized economy and to detect multiple transition paths in the decentralized economy for a large external effect, which are hidden when using the maximum principle. We simulate the global transitional dynamics towards the balanced growth path. The adjustment of the model?s state variable turns out to accelerate along the transition paths. By the asymmetry of the sectors an until now unknown feature is predicted for the adjustment in the output growth rate. Its relative speed follows a hump-shaped course: Starting from a relative scarcity in physical capital, the growth rate of output decelerates first before it starts rising again.

Date: 2003
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Working Paper: Transitional Dynamics in the Uzawa-Lucas Model of Endogenous Growth (2004)
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