Numerical Simulation of an Endogenously Growing Economy and Its Balanced Growth Path

In this paper, I simulate how an economy grows endogenously and reaches a balanced growth path supposing that households behave under the MDC (maximum degree of comfortability)-based procedure, where MDC indicates the state at which a household feels most comfortable with its combination of income and assets. Although it is not easy to numerically simulate the path to a steady state in dynamic economic growth models in which households behave generating rational expectations, it is easy if households are supposed to behave under the MDC-based procedure to reach a steady state. The simulation results indicate that an economy can indeed grow endogenously as predicted theoretically, although some small scale effects exist. If uncompensated knowledge spillovers are restrained, however, large scale effects are generated. A lower degree of risk aversion increases the growth rate. In addition, economies converge if productivities are identical, but they diverge if they are not.