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. Following a nominal shock, a fraction of the consuming public is subject to price illusion attributable to computing difficulties or lack of information.
Firms adapt their pricing strategies in order to discriminate against various consumer types.
In this model, suboptimal behavior of some consumers alters the terms of trade for the entire economy and may entail a welfare improvement. Tests using U.K. quarterly private sector data over the period 1955 to 1994 generally support the model's predictions. An econometric procedure to identify the permanent shocks in vector error correction models is proposed, which allows one to combine long-run and contemporaneous restrictions. We argue that a real spending shock in place of the real interest rate shock appears to better accommodate their empirical findings. The de-facto devaluation of the Thai baht in July 1997 began the ongoing currency turmoil in Asia.