Equilibrium Dynamics in Discrete-Time Endogenous GrowthModelwithSocialConstant Returns. Economic Theory, forthcoming

Abstract: The existing literature establishes possibilities of saddle-path stability and dy-namic indeterminacy in continuous-time two-sector models of endogenous growth with so-cial constant returns. The necessary and sufficient condition for saddle-path stability is that the factor intensity rankings of the two sectors are consistent in the private/physical and social/value sense. The necessary and sufficient condition for dynamic indeterminacy is that the final (consumable) good sector is human (pure) capital intensive in the private sense but physical (consumable) capital intensive in the social sense. This paper re-examines the dynamic properties in a discrete-time endogenous growth framework and finds that con-ventional propositions obtained in continuous time need not be valid. Under full capital depreciation, the balanced growth path is always a saddle, regardless of the factor intensity rankings. With partial capital depreciation, the established necessary and sufficient condi-tions on factor intensity rankings for saddle-path stability and dynamic indeterminacy are neither sufficient nor necessary, as the magnitudes of time preference and capital depreciation rates both play essential roles. (JEL Classification: E32, J24, O40