Steady-State Features of an Optimization-Based Endogenous Growth Model

This paper studies an endogenous growth economy with two sectors owned by a life-time utility maximizing representative household, one sector producing consumption goods and the other sector producing knowledge and technology. The stationary Euler conditions are used to derived relationships describing balanced growth that may be analyzed for its steady-state features. I shows that a period of secular stagnation, represented by a drop in the balanced growth rate, raises the equilibrium ratios of capital to output and permanent to current income and lowers the equilibrium ratios of investment to capital and GDP, as well as the saving rate. A permanent decline in growth also lowers the share of labor and the equilibrium interest rate, where the drop in the latter is in greater or lesser proportion depending on whether the degree of risk aversion in consumption is greater or less than one. The ratio of innovation to accumulated knowledge is invariant to changes in the balanced growth rate, rising only with population growth