Optimal growth in the two-sector neoclassical growth model

This article analyzes optimal growth in the neoclassical two-sector model. First, the optimal savings ratio is derived corresponding to that growth path which maximizes consumption at each point of time. Secondly, it can be shown that this optimal savings ratio is the limit for the optimal savings ratio as derived by Pontryagin's maximum principle for an optimal policy, when the social discount rate for future per capita consumption approaches zero.This work was supported by the Deutsche Forschungsgemeinschaft, West-Germany.     

A two-sector Kaleckian model of growth and distribution with endogenous productivity dynamics

This study extends a two-sector Kaleckian model of output growth and income distribution by incorporating endogenous labour productivity growth. The model is composed of investment goods and consumption goods production sectors. The impact of a change in wage and profit shares on capacity utilisation and output growth rates at the sectoral and aggregate levels are identified. The study reveals short-run cyclical capacity utilisation rates and productivity growth dynamics. Even if the short-run steady state is stable, the capital accumulation rate in the consumption goods sector must decrease more than that in the investment sector for long-run stability. When simultaneous rises in profit shares in both the sectors affect long-run aggregate economic growth differently at a steady state, the distributional interests between the same class in different sectors may hamper the long-run economic growth. A policy message is that the effect of income distribution on industrial output growth is not always beneficial. These phenomena are specific to two-sector models and cannot be observed when using conventional aggregate growth models.     

Business cycles in a two-sector model of endogenous growth

Summary. This paper analyzes the impact of cyclical volatility on long-term economic growth: does growth increase or decrease with increased cyclical volatility? We construct a stochastic two-sector model of endogenous growth to analyze this question in detail. We will show that economic growth is higher in the presence of business cycles, since people devote more time to learning activities in an uncertain economic environment. Human capital is a hedge against future income uncertainty. Hence, the rate of economic growth will be higher in a stochastic environment. Based on a calibration of the model, we find that economic growth increases by 0.46%-point as a result of observed business cycle variability. When account is taken of the interaction between the model's general equilibrium and the cycle, welfare gains (measured in units of a permanent percentage increase in consumption) from eliminating business cycle volatility are approximately 1.87%. Received: January 25, 2000; revised version: November 3, 2000     

Optimal labor income taxation in a two-sector dynamic general equilibrium model

This paper presents a new approach to the two-sector optimal taxation problem. We derive the optimal labor income tax rate which depends on factor intensity across sectors. It is the labor intensity that determines the initial wage rate, and therefore the optimal labor tax rate. We show that an increase in the initial relative price of consumption goods decreases the optimal tax rate on labor income in the case that the consumption goods sector is capital-intensive while it increases the optimal tax rate on labor income in the case that the investment goods sector is capital-intensive.     

Culture and human capital in a two-sector endogenous growth model

Recent literature in the field of cultural economics highlights a possible inversion in the usual causality relation (from economic growth to culture) and points out that culture may represent an important driver of economic growth. By viewing culture in line with Throsby’s (2001) definition of cultural capital (i.e., an asset of tangible and intangible cultural expressions), in this article we analyze one possible channel through which culture may positively affect economic growth, namely the existence of a relationship of complementarity between cultural and human capital investments. Using a two-sector endogenous growth model, we find that in the long run a higher growth rate of real per-capita income can be attained the more cultural and human capital investments are complementary for each other in the process leading to agents’ skill acquisition. We also analyze the conditions under which an increase of the cultural capital share in total GDP can be conducive to a rise of real per-capita income.     

Taxation and employment in general equilibrium: A two-sector analysis

The literature on public finance has so far completely ignored the question of unemployment. In this paper, the traditional two sector model of tax incidence is utilized to develop a model in which the effect of various taxes can be analyzed and compared. On the basis of this model, we have compared and studied the effect on employment of various equal-yield and equal-rate taxes. Also, on the basis of reasonable empirical assumptions certain policy conclusions are stated.     

A two-sector overlapping generations model with heterogeneous capital

Summary. This paper characterizes the existence and stability properties of steady state solutions as well as the nature of transition paths of a two-sector growth model with heterogeneous capital. It compares the properties of a Cobb-Douglas–Leontief economy with heterogeneous capital with the properties of the same economy with homogeneous capital. The model with heterogeneous capital reveals a set of characteristics different to those of the model with homogeneous capital. These include the saddle-path stability of the non-trivial steady state as well as the possibility of overshooting and in contrast to the homogeneous capital case, the possibility of damped oscillations along the transition path for realistic parameter values. Received: September 21, 2001; revised version: November 21, 2002 RID="*" ID="*" We thank Costas Azariadis, and Laurie Conway for helpful comments on a previous draft. The paper has substantially benefited from the feedback of an anonymous referee. Correspondence to: R. Wendner     

Dynamics of a two-sector endogenous growth model with intersectoral knowledge spillovers

In a two-sector endogenous growth model with learning by doing and intersectoral knowledge spillovers, we associate local dynamics with the slope of the excess demand curve for a consumption good. Factor intensity determines the income effect, which governs dynamics. We are grateful to an anonymous referee for his/her helpful comments and suggestions.     

A general formula for the optimal level of social insurance

In an influential paper, Baily (1978) showed that the optimal level of unemployment insurance (UI) in a stylized static model depends on only three parameters: risk aversion, the consumption-smoothing benefit of UI, and the elasticity of unemployment durations with respect to the benefit rate. This paper examines the key economic assumptions under which these parameters determine the optimal level of social insurance. I show that a Baily-type expression, with an adjustment for precautionary saving motives, holds in a general class of dynamic models subject to weak regularity conditions. For example, the simple reduced-form formula derived here applies with arbitrary borrowing constraints, durable consumption goods, private insurance arrangements, and search and leisure benefits of unemployment.     

The myth of a booming town: a two-sector model of Macau economic growth

This paper builds a trade-based equilibrium, two-sector model to reveal the inefficiency of a foreign-dominated, gaming-biased, bubble growth in Macau. This fast GDP growth that has not led to much real development as measured by the effective GNP would likely have adverse impacts on the city's long-term prosperity. We employ the model to analyze why various gaming markets have adopted differing tax rates. This work provides a rigorous argument against the problematic attempts to push for low tax convergence in the Asian gaming market. To neutralize the damaging effects of foreign domination in the local economy, we offer several policy recommendations for reviving home businesses and enhancing domestic welfare in Macau. It is suggested that enforceable laws should be made to prevent the foreign firms with cross-market operations from stealing away Macau customers, that differential taxes on casino operators and income taxes on player winnings should be chosen to support Chinese-owned casinos and curb pathological gambling, and that a sovereign wealth fund should be established to stop too much of Chinese gaming money from being lost too fast and foster Macau's economic autonomy by reducing its overreliance on foreign concerns for output growth.     

Indeterminacy and cycles in two-sector discrete-time model

Summary. We consider a discrete-time two-sector Cobb-Douglas economy with positive sector specific external effects. We show that indeterminacy of steady states and cycles can easily arise with constant or decreasing social returns to scale, and very small market imperfections. This is in sharp contrast with most of the contributions in the literature in which increasing social returns are required to generate indeterminacy. Received: July 31, 2000; revised version: June 5, 2001     

The supply side in a post-Keynesian two-sector model

Summary In order to avoid missing the wood for trees a brief summary of the results having been obtained above appears to be appropriate.Firstly, we regard it as a result in itself of the present paper to have presented a two-sector model encapsulating a Kaleckian (and Kaldorian) vision of a capitalist economy, a model in which supply conditions of primary products take up a prominent position.Secondly, it belongs to the main results of the paper that it has laid bare, through the model presented, an astoundingly simple pattern in the way economic key-concepts such as activity, employment and distributive shares are affected by on one hand the demand side (which has so far captured an excessive amount of attention in macroeconomic modelling) and on the other hand the largely neglected supply side of the economy.Thirdly, by means of an arbitrary but not implausible numerical example we have attempted to indicate how changes in activity and distributive shares caused by exogeneous changes on the demand and supply side of the economy, respectively, are in themselves crucially dependent on (the assumptions concerning) the supply elasticity of primary products.The notation applied will be as follows C consumption - C ⁰ autonomous element of the consumption function - I investment (gross) - A autonomous expenditure - S savings (gross) - U stock of the primary product - Q real output (not necessarily real income) (gross) - Y income (gross) - W wage bill - L employment - w money wage rate - p price level - mark-up factor - level parameter of the production function pertaining to the primary sector - a labour-input coefficient of the industrial sector - b raw-material input coefficient of the industrial sector - s _w marginal propensity to save out of wages - s marginal propensity to save out of profits - s (weighted) average ofS _w ands - (unit) raw material costs as a proportion of total (unit) prime costs - share of wages in total income - E _{y, x} partial or total elasticity ofY with respect toX. I am most grateful to Søren Gammelgård, Peter Guldager, Erik Strøjer Madsen, Jørgen Ulff-Møller Nielsen, Kurt Pedersen and an anonymous referee for their valuable suggestions and helpful comments on an earlier draft of this paper.     

Undiscounted optimal growth in the two-sector Robinson-Solow-Srinivasan model: a synthesis of the value-loss approach and dynamic programming

We highlight two features of undiscounted optimal growth in the context of a two-sector model due to Robinson, Solow and Srinivasan. First, we use the value-loss approach of Radner-Gale-McKenzie to show a multiplicity of optimal programs in situations when optimality does not coincide with value-loss minimization. Second, we use a theory of undiscounted dynamic programming, not available in the literature, to derive properties of the optimal policy correspondence. In terms of a methodological perspective, we suggest a synthesis of the two methods for the analysis of problems of optimal intertemporal resource allocationThis essay is dedicated to Mukul Majumdar on the occasion of his sixtieth birthday, with affection and admiration. We would like to thank Robert Becker, Minako Fujio and Ron Jones for useful discussions and to a referee of this journal for very insightful comments. We are grateful to the Center for Analytic Economics at Cornell and to the Center for a Livable Future at Johns Hopkins for research support     

A general model for short-term interest rates

A general one-factor model for short-term interest rates is proposed. Besides the long memory fractionally integrated mean process, the model also consists of a power function of the interest rate as well as the GARCH effect in the conditional variance. The estimation results show that, while there is no evidence for fractional integration in the mean beyond the well-known martingale property, both the power function of the interest rate and the GARCH effect (but not the ARCH effect) are highly significant in the formation of the conditional variance. Test results also confirm a structure change in October 1979 due to the shift in the Federal Reserve monetary policy.     

A general model for culture and technology

This paper offers a process model in which the interaction of technology and social institutions can be analyzed systematically within a single frame of reference. By considering both aspects of culture, not as substantive entities to be classified as to type, but as organizational states to be described and measured by a class of variables that is truly scaleable, it is possible to describe with precision and economy, a given state of techno-social organization and also design and predict future states of technological and social organization The potentialities and properties of various possible future states can be projected as highly compressed, synoptic models since the number of variables used to describe a real or projected system-state is small. Thus the model offers a versatile instrument for disciplining rich and diverse classes of data into manageable wholes. It also offers possibilities of making normative judgements of what kind of organizational linkages between technology and social institutions will produce relative consistency or effectiveness.     

Relative price fluctuations in a two-sector model with imperfect competition

Counter-cyclical fluctuations in the price of investment in consumption units are often attributed to investment-specific technology shocks. This paper looks at an additional source for such fluctuations: sector-specific markup variations, the idea being that pro-cyclical competition and the higher variability of investment compared to consumption pushes down the relative price of investment during expansions. I find that such endogenous movements in sector-specific markups can account for up to about one quarter of the observed fluctuations in the price of investment.