Alternative approaches to technological change in a small open economy

Abstract

This article investigates the existence of distributive cycles under different assumptions on the determinants of technical change in a small open economy. Building on an evolutionary growth-cycle framework, we show that the adoption of Kaldor-Verdoorn’s law leaves the system with no internal equilibrium solution while classical-Marxian technical change leads to fluctuations of decreasing amplitude. A Hopf bifurcation analysis establishes that the combination of both formulations might give rise to persistent and bounded cyclical trajectories. Furthermore, the introduction of Schumpeterian innovation waves can generate persistent and irregular fluctuations similar to those observed in real data. The model provides a mechanism that explains the positive correspondence found in the literature between economic complexity and income inequality that is compatible with the concept of Power Biased Technical Change. Given the lack in the literature of reliable estimates for the Marxian specification, we estimate a panel-VAR for a sample of 16 OECD countries that gives some support to its central argument.