Balanced Growth Path Research Articles

Economic Openness and the Behaviour of Great Ratios in G20 Countries

Most of the macroeconomic models suggest that great ratios of economics should be stable in the long term. Keeping the theoretical consequences in mind, the present study investigates the order of integration of two great ratios, viz. consumption–output and investment–output ratios. The study employs both mean shift and trend shift unit root tests with a structural break to examine the stationarity property of great ratios. This article attempts to analyse the relationship between economic openness and the behaviour of great ratios. Results of the study indicate a balanced growth path for 10 out of 18 G20 countries considered in our analysis. Findings show that countries that have a deficit trade balance with surplus foreign direct investment are more likely to demonstrate a balanced growth path. The multivariate analysis shows evidence in support of the balanced growth hypothesis in 13 of the 18 G20 countries. Of the 18 countries analysed, 8 internationally open and 6 financially open countries provide support for the balanced growth path. JEL: C20, E20, O50

Education Versus Infrastructure: Is There a Trade-off in an Open Economy with Perfect Capital Mobility?

We present an open economy growth model incorporating various elements of fiscal policy, including government expenditure on education and public capital (infrastructure), budget deficit, internal and external public debt, public consumption, and four tax rates. This detailed description of fiscal policy allows for a systematic study of the relationship between fiscal policy and economic growth. We derive the balanced growth path and analyze its properties, including existence, uniqueness, and stability. The theoretical results are supported by numerical simulations for Poland, with the model calibrated based on data from the years 2010 to 2019. In the baseline scenario, the GDP growth rate converges to 3.98%. However, through appropriate adjustments to fiscal policy, economic growth can be significantly accelerated. Notably, increasing spending on both education and public infrastructure proves to be the most effective way to permanently boost economic growth, even if it requires raising taxes on consumption or increasing public debt.

Analyzing the impact of tax-based vs. rent-based funding on the effectiveness of environmental protection policies

The necessity of government intervention, particularly through public spending, to address market failure in providing public goods like environmental quality is widely recognized. However, the effectiveness of fiscal environmental policies in improving the environment remains unclear. This paper aims to explore the impact of funding sources for government expenditures on environmental quality. Using a Ramsey growth model, we investigate the consequences of two alternative funding sources for environmental protection: Taxes and natural resources rents. The model highlights that along the balanced growth path, financing environmental spending through taxes enhances environmental quality, while funding from natural resources rents leads to its deterioration. Furthermore, the model emphasizes the crucial role of socio-political institutions governing the economy in understanding the link between environmental protection expenditures and environmental outcomes. To test the model's propositions, we utilize a panel dataset of 76 countries spanning from 1995 to 2018. Our empirical findings corroborate the notion that the funding sources of environmental protection expenditures significantly impact environmental outcomes. Additionally, the results indicate that higher institutional quality, such as greater state capacity, enhances the effectiveness of the government's environmental spending in improving environmental quality. Our findings offer valuable insights for policymakers and researchers seeking to design effective strategies for environmental preservation and sustainable growth.

Economic Growth Analysis When Balanced Growth Paths May Be Time Varying

AbstractThe determinants of an economy's growth path for income per head may vary over time. In this paper, we apply unobserved components analysis to an otherwise standard panel model of economic growth dynamics so that an economy's long‐run relative income per head can change at any point of time. We apply this model to data for US states for 1929–2021 and the world economy for 1970–2019. In both datasets an economy's initial relative income per head is a good predictor of its long‐run relative income per head. Relatively poor economies on average remain relatively poor.

Artificial intelligence based technologies and economic growth in a creative region

ABSTRACT We analyze economic growth in a stylized, high-tech region A with two key features. First, the residents of this region are high-tech because they possess skills. In the language of Richard Florida, these residents comprise the region’s creative class and they possess creative capital. Second, the region is high-tech because it uses an artificial intelligence (AI)-based technology and we model the use of this technology. In this setting, we first derive expressions for three growth metrics. Second, we use these metrics to show that the economy of A converges to a balanced growth path (BGP). Third, we compute the growth rate of output per effective creative capital unit on this BGP. Fourth, we study how heterogeneity in initial conditions influences outcomes on the BGP by introducing a second high-tech region B into the analysis. At time t = 0 , two key savings rates in A are twice as large as in B . We compute the ratio of the BGP value of income per effective creative capital unit in A to its value in B . Finally, we compute the ratio of the BGP value of skills per effective creative capital unit in A to its value in B .

Unemployment and the direction of technical change

I construct and analyze a growth model in which technical change can increase unemployment. I first analyze the forces that deliver a constant steady state unemployment rate in this setting. Labor-saving technical change increases unemployment, which lowers wages and creates incentives for future investment in labor-using technologies. In the long run, this interaction generates a balanced growth path that is observationally equivalent to that of the standard neoclassical growth model, except that it also incorporates a positive steady state level of unemployment and a falling relative price of investment. I also study the effects of a permanent increase in the ability of R&D to improve labor-saving technologies. In the long run, this change leads to faster growth in output per worker and wages, but it also yields higher unemployment and a lower labor share of income. In the short run, this change exacerbates existing inefficiencies and slows economic growth.

Economic resilience and the dynamics of capital stock

Abstract The role of capital in measuring resilience is investigated. Focusing on the current short-run and potential long-run growth paths of the economic system, we propose new indexes to separately measure adaptability and resistance to shocks, which are the essence of a system’s resilience. Capital dynamics during the transition and along the balanced growth path are used here instead of employment to represent the evolution of the size and composition of the economy. Our indexes measure adaptability and resistance by comparing the two capital growth rates. They are built by mimicking the average and variance of the difference in growth rates. In this new setting, investment and depreciation flows play an important role in explaining what the partial index of adaptability reveals. The available data on the USA and Spanish capital allow us to empirically compute the indexes and draw conclusions about their ability to resist shocks and absorb their effects. We conclude that the US economy is more adaptable and has a greater capacity to absorb impacts than the Spanish economy, but it is less resistant to disturbances.

Stability and mean growth rate of stochastic Solow model driven by jump–diffusion process

This work focuses on the stability and mean growth rate of stochastic Solow growth model. The uncertainty in our model is generated by the technology part, which includes fluctuations on the technological accumulation and jump growth from new inventions and ideas. We introduce the criteria of stability, including stochastic stability and exponential stability, and the sufficient condition for the existence of balanced growth path. Furthermore, we precisely calculate the higher-order moment of effective capital–labor ratio and the mean growth rate of major economic quantities on the balanced growth path. Our analysis sheds light on the impact of various stochastic effects on economic quantities and provides insight into the stability of the stochastic Solow model with technological uncertainty.

Dilema Harrod-Domar, Lei de Thirlwall e Novo Desenvolvimentismo Verde

ABSTRACT The article aims to address the ecological transition into a model that integrates the Harrod-Domar Dilemma and the New Developmentalism according to a Green New Developmentalism perspective. To this end, this paper focuses on the green sides of the middle-income countries’ traps by introducing a novel concept of the ecologically sustainable output growth rate into the new developmentalism model developed by Oreiro (2023) to identify a balanced ecological growth path. Compensating for the price competitiveness losses produced by the exchange rate over-valuation, Ecological Structural Change and green finance allow for reversing the process of premature de-industrialization by improving the competitiveness of the manufacturing sector.

Creative destruction, human capital accumulation, and growth in a digital economy

Abstract The rapid development of the digital economy has highlighted the crucial role of data in economic growth. This study investigates the impact of two types of innovation on long-term growth by incorporating data into a model of creative destruction and knowledge accumulation. Unlike traditional factors, data exhibit nonrivalry between the two research and development (R&D) sectors, thereby influencing the growth rate of economic outputs simultaneously without interference. Our findings reveal the existence of a balanced growth path (BGP) in both the decentralized economy and the social planner’s economy. In horizontal innovation, data can be transformed into digital knowledge to promote the economic growth [Cong et al. (2021)]. In addition to horizontal innovation, the utilization of data in vertical innovation also enhances the success rate of innovation, with a gradual decrease in per capita data usage on the BGP. Moreover, as agents accumulate human capital, the economy achieves higher output levels, effectively addressing consumer privacy concerns. However, along the transitional path, insufficient data provision by both R&D sectors leads to lower economic growth rates or more intense economic fluctuations, necessitating policy interventions.

International trade and economic growth in Croatia

This article argues that Croatia’s growth over the past two decades is deeply related to the dynamics of international trade. Under the premise that what is bought and sold in global markets reflects the economy’s fundamentals, we show that the rate of growth compatible with equilibrium in the balance-of-payments, i.e. the dynamic Harrod trade multiplier, is a good predictor of the country’s actual long-run growth rate. For this purpose, we apply a state–space model and the Kalman smoother to obtain time-varying parameter estimates of the exports and imports functions. We use these estimates to investigate the determinants of international non-price competitiveness. Bayesian Model Averaging (BMA) and Weighted Average Least Squares (WALS) techniques are combined to tackle model selection uncertainty. It is shown that R&D investments and human capital accumulation are the most important explanatory variables. The success of the European Union’s (EU) integration process depends on the capacity of its new members to achieve a balanced-growth path. Being the last country to join the union, the experience of this single country is particularly relevant to understand possible development alternatives for the region. We conclude by highlighting the policy relevance of our findings to the evaluation of Croatia’s catching-up performance as part of the EU.

Flexible time horizon planning, learning and aggregate fluctuations

A dynamic general equilibrium model is constructed and analyzed under the assumptions that the representative decision maker is endowed with incomplete knowledge about his environment of interest along with limited cognitive skills. Under various beliefs about the long-run growth prospects consistent with Kaldor's, 1961 stylized facts, the benchmark infinite-dimensional decentralized planning problem collapses into infinite sequences of T>1 dimensional sub-problems which are each within the decision maker's limited computing range. Based on the time length of the planning horizon and the nature of expectations, the resulting framework in which both forecasts and plans may get revised in the light of new information encompasses at the limits the benchmark infinite horizon case with perfect foresight, a rolling infinite horizon case, a self-fulfilling static planning case and Day's, 1969 two-period heuristic case. Under exogenous price and quantity growth forecasts consistent with the perfect foresight steady-state balanced growth path, the time length of the planning horizon may have no effect on the resulting competitive equilibrium which may deviate dramatically from the optimal solution. When these growth forecasts are endogenous, the competitive equilibrium effects of the planning horizon time length depend on the characteristics of the information sets. The resulting model may help us to better understand how economies respond to shocks by unraveling new propagation mechanisms related to changes in optimism or pessimism about short-run and/or long-run growth prospects.

Balanced growth and degrowth with human capital

In a simple discrete-time version of Lucas (1988) we find that the Balanced Growth Path (BGP) is always the unique optimal planner’s solution: with linear or strictly concave production functions, with unbounded utility functions, with or without human capital depreciation. When the ”speed” of human capital accumulation is high, the optimal working time is constant and below its upper bound. Capital grows at a constant factor, but degrowth is also possible when this factor is less one (under positive capital depreciation). When this speed is low, optimal working time is at its boundary and capital declines at its depreciation factor (degrowth).

O quarteto impossível em um modelo supermultiplicador de crescimento liderado pela demanda para uma pequena economia aberta

ABSTRACT The aim of this paper is to investigate the long run sustainability of a growth path led by multiple non-creating capacity autonomous expenditures in a demand led-supermultiplier model for a small open economy. Using two different models the results show that it is impossible to have in the same model long-term economic growth driven by the non-capacity creating component of domestic demand, exogenous income distribution, long-run balance between productive capacity and aggregate demand and balance of payments equilibrium. Economic viability of the balanced-growth path demands growth to be led by exports, at least for small open economies.

The wage fund theory and gains from trade in a dynamic Ricardian model

AbstractThe theory of wage fund as the basic source of financial capital or credit is incorporated into a dynamic Ricardian trade model consisting of three classes of agents: the workers, the capitalist, and the producers of goods. We derive the modified golden rule based on a significantly different mechanism from the standard optimal growth framework. We show that, although international trade in a static setting in the wage fund framework has asymmetric distributional effects on the agents' welfare, those asymmetric impacts are nullified in the dynamic setting. In fact, trade liberalization is Pareto improving along the balanced growth path.

Public debt and welfare in a quantitative Schumpeterian growth model with incomplete markets

This paper quantifies the welfare effects of counterfactual public debt policies using an endogenous growth model with incomplete markets. The economy features public debt, Schumpeterian growth, infinitely-lived agents, uninsurable income risk, and discount factor heterogeneity. Two versions of the model are specified, one with households holding equity in the group of innovating firms. The model is calibrated to the U.S. economy to match the degree of wealth inequality, the share of R&D expenditure in GDP, the firms’ exit rate, the average growth rate, and other standard long-run targets. When comparing balanced growth paths, I find large welfare gains in equilibria characterized by governments accumulating public wealth. The result is robust to the mechanism used to generate a highly concentrated wealth (i.e., preference heterogeneity or “superstar” income shocks). Welfare effects decompositions show that level effects and growth effects reinforce each other. The responses of both the intermediate goods and their market conditions are key in explaining the large level effects. The version of the model without equity is computationally easier to solve, allowing to consider transitional dynamics. Taking into account the dynamic adjustment to the new long-run equilibrium, I show that the transitional welfare costs are not large enough to change the sign of the welfare effects stemming from a change in public debt. I find that eliminating public debt would lead to a 0.8% increase in welfare, while moving to a debt/GDP ratio of 100% would entail a welfare loss of 0.5%. A decomposition analysis shows that growth accounts for approximately 50% of the overall welfare effects.

A Household’s Preferences Vary Depending on Whether Incomes Are Permanent or Temporary: A Solution to the Time-Inconsistency Problem and Equity-Premium Puzzle

A household’s preferences are usually assumed not to vary temporally or depending on the objects to which they are applied, but this assumption is often inconsistent with empirical estimates, for example, with the time-inconsistency problem of the time preference rate and the equity-premium puzzle. I show that these inconsistencies are generated because a household’s preferences vary depending on whether they are applied to permanent or temporary incomes. Preferences applied to permanent incomes are anchored to the steady state or a balanced growth path, but those for temporary incomes are not. Hence, the former is fixed and unchanged, but the latter can take various values depending on conditions. Copyright© 2023 The Author(s). This article is distributed under the terms of the license CC-BY 4.0., which permits any further distribution in any medium, provided the original work is properly cited.

Public debt and income inequality in an endogenous growth model with elastic labor supply

In this study, we examine the relationships among long-run public debt policy, economic growth, and income inequality by extending a representative consumer theory of distribution and using an endogenous growth model with a sustainable fiscal rule, elastic labor supply, and initial endowment of heterogeneous wealth. We show that fiscal policy with strict (loose) budgetary discipline decreases (increases) the economic growth rate in the short run. In contrast, it increases (decreases) the economic growth rate in the long run. Then, we show that fiscal policy with strict (loose) budgetary discipline decreases (increases) income inequality in both the short and long run. First, we show that a balanced growth path is a locally stable saddle point. Then, we consider the relationships among public debt, the economic growth rate, and income inequality. In this model, the average leisure and the public-debt-to-private-capital ratio determine the rate of return and wage rate, affecting both the economic growth rate and income distribution across agents. We conclude that there is a negative relation between the economic growth rate and the measure of income inequality in the long run by conducting numerical simulations using US data. The policy implication of this paper is that the government has a public debt policy that achieves both faster economic growth and the improvement of income inequality.

Dynamic co-movement between economic growth and language: A new perspective of technological progress

To investigate whether language complexity has significant effects on technological progress and economic growth, this paper not only improves a concise endogenous growth model with open economy in which reducing the degree of official language complexity can help one country gain rapid technological progress and economic growth in balanced growth path, but also applies stochastic frontier analysis (SFA) and two-way fixed effect model to investigate our hypothesis. Using the database ethnologue distributed by Lewis et al. (2014) and the Penn World Table 9.1 about 89 countries and regions from 1990 to 2018, we consider the number of verb conjugations of official language to be the indicator of language complexity, and examine its effects on technological change and economic growth. The empirical findings demonstrate that reducing language complexity has a significant positive effect and time-lag influence on technological change and economic output. Meanwhile, the positive effect of linguistic complexity on technological progress and economic growth is stronger for these countries with isolating languages than those with other language families, as well as for middle and low-income countries than high-income countries. For developing countries and these countries with isolating and agglutinative languages, they are urged to simplify their native language and reform the second language learning institution in schools in order to achieve a high level of development.

A note on variable markup, knowledge spillover, and multiple steady states in the variety expansion model

Abstract This paper incorporates the variable elasticity of substitution preferences in the variety expansion model developed by Grossman and Helpman [(1991) Innovation and Growth in the Global Economy, MIT Press]. There exists a balanced growth path when the elasticity of substitution is constant with knowledge spillover. When the elasticity of substitution is variable and the knowledge spillover is sufficiently small, a unique and stable steady state exists. When the knowledge spillover is sufficiently large, the steady state is unique and unstable. When the size of the knowledge externality is moderate, multiple equilibria exist.