Transitional Dynamics of an Endogenous Growth Model with an Erosion Effect

The convergence features of an Endogenous Growth model with Physical capital, Human Capital and R&D have been studied. We add an erosion effect (supported by empirical evidence) to this model, and fully characterize its convergence properties. The dynamics is described by a fourth-order system of differential equations. We show that the model converges along a one-dimensional stable manifold and that its equilibrium is saddle-path stable. We also argue that one of the implications of considering this “erosion effect” is the increase in the adherence of the model to data. JEL Classification: O11, O15, O31, O33, O41. Key-Words: endogenous growth models; convergence; erosion effect; model fitness. ∗e-mail : [email protected]. I am indebted to Manuel Gómez and Ana Balcão Reis for their helpful comments and suggestions. I gratefully acknowledge financial support from POCI/FCT Fundação para a Ciência e Tecnologia. All remaining errors are mine alone.