Path-dependent economic growth with technological trajectory

Abstract

This paper develops an integrated model of neoclassical and endogenous growth, which accounts for both income inequalities across countries and the convergence hypothesis, while all the growth stylized facts are satisfied. The model in this paper assumes that an economy industrializes in two stages. In the first stage, the economy starts industrialization through factor accumulation (the Solow stage); and after sufficient factor accumulation, it switches to the second stage of endogenous growth through innovation (the AK stage). Therefore, it becomes crucial to determine when switching from the Solow to the AK stages is implemented. We model this switching problem as a two-stage optimal control and show that the growth rate declines during the Solow stage, while in the AK stage it becomes constant. In addition, we draw several policy implications.

Keywords:

• path dependency
• convergence hypothesis
• Solow stage
• AK stage
• two-stage optimal control

JEL Classification :

• O14
• O33
• O41

Acknowledgements

I would like to thank two anonymous referees and the editor for their very useful comments and suggestions. I also benefit from comments by seminar participants at the macroeconomic seminar at Osaka University. This paper has been financially supported by the COE project at the Graduate School of Business Administration, Kobe University. All errors in this paper are mine.

Notes

This statement is based on a suggestion made by the editor.