10 AN ENDOGENOUS GROWTH MODEL
10.1 ECONOMIC PROBLEM
In Chapter 9, we looked at the Solow-Swan growth model in some detail (henceforth the ‘Solow model’). The central result of the Solow model is that saving drives growth, but this is temporary, as the economy tends to a stationary state in the long run, due to the diminishing returns to capital. In other words, increasing savings can only deliver ‘scale’ effects but not ‘growth’ effects, i.e. the scale of output growth increases in the short term but there is no increase in the long-run growth rate. Such a result runs counter to the Keynes-inspired growth models where capital accumulation – the independent role of investment – is the prime mover, similar to ...
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