CAPITAL MOBILITY IN NEOCLASSICAL MODELS OF GROWTH

The neoclassical growth model accords with empirical evidence on conve rgence if capital is viewed broadly to include human investments, so t hat diminishing returns to capital set in slowly, and if differences i n government policies or other variables create substantial difference s in steady-state positions. However, open-economy versions of the the ory predict higher rates of convergence than those observed empiricall y. We show that the open-economy model conforms with the evidence if a n economy can borrow to finance only a portion of its capital, for exa mple, if human capital must be financed by domestic savings.