Do Ak models really lack transitional dynamics?

Yoseph Yilma Getachew


Contrary to a popular belief, the most popular Ak growth models display transitional dynamics once the representative agent and complete markets as- sumptions are overturned. The class of models is identi.ed with diminishing- returns at individual but constant-returns at aggregate due to externality e¤ects. Under incomplete markets, the former implies that dynasties with a lower levels of initial capital grow faster. This is picked up by the aggregate economy that passes through a long transitional period before it converges to its balanced growth path. During the transition period, aggregate con- sumption and output grow at the same rate but higher than that of capital.

Key words: Transitional dynamics, Ak model, inequality dynamics, heterogeneous households, incomplete capital market

JEL Classi.cation: D3, E, O4

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