Factor substitution, long-run equilibrium, and convergence speed in the Lucas model

Factor substitution, long-run equilibrium, and convergence speed in the Lucas model

We study the effect of factor substitution on long-run equilibrium in the Lucas model with CES production. The long-run growth rate does not depend on the elasticity of substitution. However, there is a negative (positive) relationship between the elasticity of factor substitution and the convergenc...

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Veröffentlicht in:Economics letters 2023-11, Vol.232, p.111358, Article 111358
1. Verfasser: Gómez, Manuel A.
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capital
Convergence speed
Elasticity of substitution
Endogenous growth
Human capital
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description We study the effect of factor substitution on long-run equilibrium in the Lucas model with CES production. The long-run growth rate does not depend on the elasticity of substitution. However, there is a negative (positive) relationship between the elasticity of factor substitution and the convergence speed if the baseline ratio of physical capital to effective labor is below (above) its steady-state value. •We study the effect of factor substitution on long-run equilibrium in the Lucas model.•The long-run growth rate does not depend on the elasticity of substitution (EOS).•For a capital-poor economy, the higher the EOS the lower is the speed of convergence.•For a capital-rich economy, the higher the EOS the higher is the speed of convergence.
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subjects capital
Convergence speed
Elasticity of substitution
Endogenous growth
Human capital
title Factor substitution, long-run equilibrium, and convergence speed in the Lucas model
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