| The two-sector optimal growth model with discounting was analyzed by Srinivasan (1962, 1964), Uzawa (1964), Shell (1967) and Haque (1970) with smooth technologies and by Bruno (1967) with Leontief technologies, all in a continuous time framework. In this diverse literature, saddle-point stability obtains irrespective of capital intensity assumptions. In this dissertation, in a discrete time setting we identify a parameter zeta standing for the marginal transformation of capital between today and tomorrow under full utilization of factors and show its instrumentality in providing a complete analysis of the model in the undiscounted setting. This is the first substantive contribution of the dissertation. The second contribution is to show that this same parameter plays a threshold role in connecting the undiscounted case to the discounted case. When the discount factor is higher than 1/zeta, the discounted optimal policy is identical to the undiscounted one. Such a connection, essentially for providing a comprehensive analysis of the model, has not been made so far in the two-sector literature. |
