UNU-MERIT Working Papers Series
Do Ak models really lack transitional dynamics?
Yoseph Yilma Getachew #2012-011Contrary to a popular belief, the most popular Ak growth models display
transitional dynamics once the representative agent and complete markets
as- sumptions are overturned. The class of models is identi.ed with
diminishing- returns at individual but constant-returns at aggregate due
to externality e¤ects. Under incomplete markets, the former implies that
dynasties with a lower levels of initial capital grow faster. This is
picked up by the aggregate economy that passes through a long
transitional period before it converges to its balanced growth path.
During the transition period, aggregate con- sumption and output grow at
the same rate but higher than that of capital.
Key words: Transitional dynamics, Ak model, inequality dynamics,
heterogeneous households, incomplete capital market
JEL Classi.cation: D3, E, O4
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