THE BEHAVIOR OF THE SAVING RATE IN THE NEOCLASSICAL OPTIMAL GROWTH MODEL

Abstract

This paper characterizes the saving rate in the Ramsey–Cass–Koopmans model analytically with a general production function when there exist both exogenous and endogenous growth. It points out conditions involving the share of capital and the elasticities of factor and intertemporal substitution under which the saving rate path to its steady-state value exhibits overshooting or undershooting or is monotonic. Simulations illustrate these interesting dynamics. The paper also identifies the general class of production functions that render the saving rate constant along the entire transition path and hence make the Ramsey–Cass–Koopmans model isomorphic to that of Solow and Swan.