Author: Gordon Schmidt
The model of endogenous economic growth developed by Paul Romer (1990a) is briefly reviewed and modified by substituting a Solow type consumption function in place of the utility maximising behaviour of consumers. The dynamic system and steady-state growth path of this Solow-Romer model are then derived. Such modification allows the dynamics of the model, in response to certain economic shocks, to be examined in terms of phase diagrams; and illustrates the instructional power of this approach. The impacts of the same economic shocks are also analysed more directly by numerical integration of the differential equations and boundary conditions describing the dynamic system of the model.
Adjustment processes are found to be relatively lengthy; and to be characterised by significant initial jumps or discontinuities in certain variables. Furthermore, in some cases these initial jumps can be in the opposite direction to that of the subsequent adjustment. Such results emphasise the importance of explicit analysis of the dynamics of the adjustment paths of growth models and their relevance for economic policy.
JEL classification: C68, O12
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