Transitional dynamics, convergence and international capital flows in two-country models of innovation and growth

Abstract

In the last chapter we restricted our attention to the balanced growth path, a standard approach for many models of endogenous growth. In this chapter the stability properties of a related balanced growth path are studied1. Nearly the entire literature of the “new” growth theory bases its results on an analysis of the balanced growth path (BGP). Such an analysis, however, has to be extended by a study of the stability properties of the BGP since a priori it is not clear whether trajectories leading to a BGP exist for all possible, historically given initial conditions. Mulligan (1991) and Mulligan and Sala-i-Martin (1993) describe a general approach, how transitional dynamics can be analyzed. Mulligan and Sala-i-Martin (1993) apply this method to a class of models characterized by the accumulation of two factors of production. The models analyzed include e.g. the Lucas (1988) model which is shown to be, at least for some parameter values, saddle path stable. This means that independently of initial conditions, all variables converge monotonically to their BGP trajectories and that a study of the properties of the BGP is a good proxy for describing the general behaviour of the model economy. In contrast to this results, Benhabib and Perli (1993) emphasise, that the BGP of the Lucas (1988) model is not necessarily saddle path stable, but can rather be reached, for certain parameter values, by a continuum of paths. If this is the case, BGP analysis is too narrow to derive statements about the behaviour of the model.KeywordsBudget ConstraintCapital FlowInternational CapitalInnovation RateBalance Growth PathThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.