The (Interesting) Dynamic Properties of the Neoclassical Growth Model with CES Production

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Despite being the standard growth model for several decades, little is actually known analytically about the dynamic properties of the neoclassical Ramsey-Cass-Koopmans growth model. This paper derives analytically the properties of the endogenous saving rate when technology takes the Constant Elasticity of Substitution (CES) form. For a factor substitution elasticity between capital and labor less than unity, the saving rate decreases along the transition path after the capital stock reaches a critical value identified analytically herein. But before reaching this critical value, the saving rate might increase and so, taken as a whole, the saving rate path might manifest overshooting.' Similarly, for a factor substitution elasticity greater than unity, the saving rate increases along the transition path after the capital stock reaches a critical value. Before reaching this critical value, the saving rate might decrease and so the saving rate path might manifest undershooting.' A simulation illustrating these interesting dynamics is presented.

Published: Smetters, Kent. "The (Interesting) Dynamic Properties Of The Neoclassical Growth Model With CES Production," Review of Economic Dynamics, 2003, v6(2,Apr), 697-707.

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