Chapter 4: Long-term investment and endogenous technical progress: dynamic and vintage-type models

Abstract

In this chapter, we set out to model the economic aspects of the CO2 problem under endogenous technical progress (Romer, 1990). Such models appear more natural and provide increased flexibility and realism for policy-making purposes. We begin with a comparison of the models with those developed in Chapter 2. The analysis considers possible long-run equilibrium solutions and possible approach paths to equilibrium. We present a solution for a constant, long-term growth path of the model and an examination of the effects of parameters on the ratio of ‘knowledge’ to capital and on the growth rate along this path.