TRANSITIONAL DYNAMICS IN 2-SECTOR MODELS OF ENDOGENOUS GROWTH

We analyze the steady state and transitional dynamics of two-sector mo dels of endogenous growth. The necessary conditions for endogenous gro wth imply that transitions depend only on a measure of the imbalance b etween the two sectors such as the ratio of the two capital stocks. We use the Time-Elimination method to analyze the transitional dynamics. Three main economic forces drive the transition: a Solow effect, a co nsumption smoothing effect, and a relative wage effect. For plausible parameterizations the consumption smoothing effect tends to dominate t he relative wage effect; transition from relatively low levels of phys ical capital is accomplished through higher work effort rather than hi gher savings.