The (Interesting) Dynamic Properties of the Neoclassical Growth Model with Ces Production

16 Pages Posted: 8 Mar 2003

See all articles by Kent A. Smetters

Kent A. Smetters

University of Pennsylvania - Business & Public Policy Department; National Bureau of Economic Research (NBER)

Date Written: March 2003

Abstract

Despite being the standard growth model for several decades, little is actually known analytically about the dynamic properties of the neoclassical Ramsey-Cass-Koopmans growth model. This paper derives analytically the properties of the endogenous saving rate when technology takes the Constant Elasticity of Substitution (CES) form. For a factor substitution elasticity between capital and labor less than unity, the saving rate decreases along the transition path after the capital stock reaches a critical value identified analytically herein. But before reaching this critical value, the saving rate might increase and so, taken as a whole, the saving rate path might manifest overshooting.' Similarly, for a factor substitution elasticity greater than unity, the saving rate increases along the transition path after the capital stock reaches a critical value. Before reaching this critical value, the saving rate might decrease and so the saving rate path might manifest undershooting.' A simulation illustrating these interesting dynamics is presented.

Suggested Citation

Smetters, Kent, The (Interesting) Dynamic Properties of the Neoclassical Growth Model with Ces Production (March 2003). NBER Working Paper No. t0290, Available at SSRN: https://ssrn.com/abstract=386163

Kent Smetters (Contact Author)

University of Pennsylvania - Business & Public Policy Department ( email )

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National Bureau of Economic Research (NBER)

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