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TWO‐SECTOR STOCHASTIC GROWTH MODELS *
Author(s) -
HARTLEY P.M.,
ROGERS L.C.G.
Publication year - 2005
Publication title -
australian economic papers
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 15
eISSN - 1467-8454
pISSN - 0004-900X
DOI - 10.1111/j.1467-8454.2005.00272.x
Subject(s) - arrow , path (computing) , population , private sector , economics , government (linguistics) , process (computing) , population growth , econometrics , path dependent , computer science , microeconomics , mathematical economics , economic growth , linguistics , philosophy , demography , sociology , programming language , operating system
This paper develops the study of two‐sector growth models of the form introduced by Arrow and Kurz (1970). We extend their deterministic model by allowing the population process to become random and by allowing the population to choose their level of effort. We find that under suitable conditions the government is able to tax and borrow in such as way as to induce the private sector to invest and consume along the path which the government considers optimal. Moreover, we also find that in some important cases the model can be solved explicitly in closed form, to the extent that we can write down expressions for tax rates and interest rates. This leads to new one‐factor interest rate models, with related taxation policies; numerical examples show very reasonable behaviour.