A simple economy with human capital: Transitional dynamics, technology shocks, and fiscal policies

Abstract

Graphical tools describe the transitional dynamics of an economy with physical and human capital. The properties that emerge make the model an interesting benchmark for the study of both long-run growth and short-run fluctuation. First, the choice to invest in human capital implies a forward-looking determination of wages. Second, for realistic parameters, the impact of permanent shocks to the goods production technology is weak on wages and strong on output. Third, public consumption shocks have stronger impact on output when they are transitory rather than permanent. And fourth, the anticipation of shocks affects the endogenous growth rate.