The transitional dynamics of an endogenous growth model: Generalizing production functions

Abstract

This paper devises a class of endogenous growth models with physical capital, human capital and product varieties. Unlike previous literature, we introduce a general specification of production that allows for disentangling the gains from specialization from the monopolistic markup. The consequences of separating both parameters on the equilibrium dynamics of the model are analyzed. We find that the long-run growth rate ceases to depend on the markup when it is disentangled from the returns to specialization, and the same happens with the conditions for saddle-path stability. Numerical simulations show that the steady-state equilibria are more prone to be stable in the model that disentangles parameters. Furthermore, the model is able to generate a rich variety of development scenarios, accounting for a number of stylized facts related to the development process of industrialized countries.