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Dynamic Analysis of a 'Solow-Romer' Model of Endogenous Growth

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  • Gordon Schmidt

Abstract

The model of endogenous economic growth developed by Paul Romer (1990a) is briefly reviewed and modified by substituting a Solow type consumption function in place of the utility maximising behaviour of consumers. The dynamic system and steady-state growth path of this Solow-Romer model are then derived. Such modification allows the dynamics of the model, in response to certain economic shocks, to be examined in terms of phase diagrams; and illustrates the instructional power of this approach. The impacts of the same economic shocks are also analysed more directly by numerical integration of the differential equations and boundary conditions describing the dynamic system of the model. Adjustment processes are found to be relatively lengthy; and to be characterised by significant initial jumps or discontinuities in certain variables. Furthermore, in some cases these initial jumps can be in the opposite direction to that of the subsequent adjustment. Such results emphasise the importance of explicit analysis of the dynamics of the adjustment paths of growth models and their relevance for economic policy.

Suggested Citation

  • Gordon Schmidt, 1997. "Dynamic Analysis of a 'Solow-Romer' Model of Endogenous Growth," Centre of Policy Studies/IMPACT Centre Working Papers ip-68, Victoria University, Centre of Policy Studies/IMPACT Centre.
    • Handle: RePEc:cop:wpaper:ip-68
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    References listed on IDEAS

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    1. M. Kurz, 1971. "The General Instability of a Class of Competitive Growth Processes," Palgrave Macmillan Books, in: F. H. Hahn (ed.), Readings in the Theory of Growth, chapter 17, pages 218-237, Palgrave Macmillan.
    2. Casey B. Mulligan & Xavier Sala-i-Martin, 1991. "A Note on the Time-Elimination Method For Solving Recursive Dynamic Economic Models," NBER Technical Working Papers 0116, National Bureau of Economic Research, Inc.
    3. Romer, Paul M, 1990. "Are Nonconvexities Important for Understanding Growth?," American Economic Review, American Economic Association, vol. 80(2), pages 97-103, May.
    4. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 71-102, October.
    5. Romer, Paul M, 1987. "Growth Based on Increasing Returns Due to Specialization," American Economic Review, American Economic Association, vol. 77(2), pages 56-62, May.
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    Cited by:

    1. Zaman, Gheorghe & Goschin, Zizi, 2010. "Technical Change as Exogenous or Endogenous Factor in the Production Function Models. Empirical Evidence from Romania," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 29-45, July.

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    More about this item

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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