Transition Dynamics in the Neoclassical Growth Model: The Case of South Korea

32 Pages Posted: 18 Dec 2012 Last revised: 28 Aug 2013

See all articles by Yongsung Chang

Yongsung Chang

University of Rochester - Department of Economics; Yonsei University - Department of Economics

Andreas Hornstein

Federal Reserve Bank of Richmond

Date Written: August 26, 2013

Abstract

Many successful examples of economic development, such as South Korea, exhibit long periods of sustained capital accumulation. This process is characterized by a gradually rising investment rate along with a moderate rate of return to capital, both of which are strongly at odds with the standard neoclassical growth model that predicts an initially high and then declining investment rate with an extremely high return to capital. We show that minor modifications of the neoclassical model go a long way towards accounting for the transition dynamics of the South Korean economy. Our modifications recognize that (i) agriculture (which makes up a large share of the aggregate economy in the early stage of development) does not rely much on capital and (ii) the relative price of capital declined substantially during the transition period.

Keywords: neoclassical growth model, transition dynamics, industrialization, price of capital, South Korea

JEL Classification: E13, E22, O11, O13, O14, O16, O4, O53

Suggested Citation

Chang, Yongsung and Hornstein, Andreas, Transition Dynamics in the Neoclassical Growth Model: The Case of South Korea (August 26, 2013). FRB Richmond Working Paper No. 11-04R. Available at SSRN: https://ssrn.com/abstract=2190615 or http://dx.doi.org/10.2139/ssrn.2190615

Yongsung Chang

University of Rochester - Department of Economics ( email )

Harkness Hall
Rochester, NY 14627
United States

Yonsei University - Department of Economics ( email )

50 Yonsei-Ro
Seoul, 120-749
Korea

Andreas Hornstein (Contact Author)

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States
804-697-8266 (Phone)
804-697-8255 (Fax)

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