International Finance Discussion Papers

Most growth models assume capital is homogeneous with regard to technology. This contradicts intuition and empirical evidence that the majority of technology is embodied in the capital stock. Berger (2001) showed that neoclassical vintage capital (embodied technology) and non-vintage capital (disembodied technology) models have different convergence rates, although identical steady state growth rates. Removing the neoclassical assumption that technological growth is exogenous, I examine two-sector, putty-putty, vintage capital models. Technological growth is tied to investment in the research sector. Savings rates and the allocation of labor differ between the vintage and non-vintage cases. It is shown for the first time that vintage and non-vintage versions of a model can have different steady state growth rates.