The Mechanism of the Links between Growth and Volatility

Abstract

This paper has investigated the signs of the relationship between growth and volatility in a new environment set by changes in assumptions of the Ramsey model to allow technological progress to become endogenous.
 A generation’s utility maximization is obtained through externalities trade named “multidimensional trade”. In contrast to the effects on long-run growth in the AK model where an improvement in the level of technology, A, which raises the marginal and average products of capital, also raises the growth rate and alters the saving rate, we found a greater willingness to hoard down or an improvement in the level of technology shows up in the long-run as higher levels of capital (unnatural resources) and output per effective worker but in no change in per capita growth rate. The steady state results of the working of diminishing returns to inputs in technology production function. This has leaded to a reformulation of Heckscher-Ohlin trade model: Productive factors that exist in abundance in a generation and that are not intensively used to produce goods and services in that generation are exported to other generations in exchange for scarce productive factors intensively used to produce goods and services that should be scarce in the generation. The goods and services with weak consumption are indirectly exported from one generation to others, whereas goods and services with high consumption are indirectly imported from other generations. Therefore Ramsey model becomes a particular case of multidimensional trade (when externalities are internalized). In that case, the tendency for saving rates to rise or fall with economic development affects the traditional dynamics, that is why, in our framework, intergenerational and international leveling out of all prices (goods and productive factors include techniques) should restore neoclassical assumptions: this is the main mechanism of the links between growth an volatility.