Multiple Equilibria In Two-Sector Models Of Endogenous Growth: A Literature Review

Why does one economy grow faster than another? This remains one of the key questions of economic science, in large part because of the hope that an understanding of the causes of growth will point to policies which will enable countries to achieve faster growth and therefore higher standards of living.It seems very natural to begin the search for an explanation of why growth rates differ by looking for differences across countries in those fundamental economic attributes which might be expected to contribute to higher growth. For example, countries with higher growth rates may save more. Or, such countries may have access to superior technology. Or perhaps citizens of higher growth countries simply work harder.This list of fundamental economic attributes could be expanded, but recently a number of studies have called this "fundamentalist" approach into question. In a variety of models of growth, there are empirically reasonable parameter values at which economic growth is indeterminate. That is to say, for given preference, given technology, and a given initial capital stock, the future equilibrium growth path of the economy is not unique, indeed is not even locally unique. This means that two "fundamentally" identical economies could evolve along quite different growth path.The main purpose of my dissertation is to trace the latest development of transitional dynamics in two-sector models of endogenous growth under the Uzawa-Lucas framework, and to explore the immanent relationship between indeterminacy (that is, multiple equilibria) and the factors such as increasing returns to scale in technology, production externality, incomplete competition, and distortionary fiscal-policy, etc. (Benhabib and Farmer(1999) did an excellent, though not extensive enough, survey on this topic)The paper is organized as follows. From chapter 2 to chapter 4 I give an elaborate analysis of the three sources that generate indeterminacy in growth model and are most frequently explored and argued by economists today: Externality, distortionary fiscal policy, incomplete competition. All models considered in the first three chapters are closed economy, therefore in chapter 5 I extend our analysis into small open economy. Then I conclude the paper and give a brief review about the tools that are widely used in economic researching fields, especially sunspots and indeterminacy.