Stability of the Market Equilibrium in Romer's Model of Endogenous Technological Change: A Complete Characterization

Abstract

Despite much interest in the dynamic behavior of endogenous growth models, the dynamics of probably the most influential endogenous growth model, Romer's celebrated model of Endogenous Technological Change, has not yet been fully analyzed. This gap in the literature is filled by the present paper. It is shown that a unique and monotonic growth path converges to the steady state. No indeterminacies can arise, as already shown by Benhabib, Perli and Xie. Instability and cyclical behavior are likewise ruled out—the equilibrium growth path is “well-behaved.”