Dynamics of Output Growth, Consumption and Physical Capital in Two-Sector Models of Endogenous Growth

This paper considers transitional dynamics of a two-sector endogenous growth model in the Uzawa-Lucas framework. We find that when the ratio of physical to human capital is sufficiently high, it is optimal for both consumption and physical capital to fall for a finite period and then gradually rise along their transition path. The paper also shows that for high values of intertemporal elasticity of consumption, rate of growth of output is increasing in the ratio of physical to human capital, while when the elasticity is moderate or low, output growth is U-shaped.