Balanced Growth Path Research Articles

Growth vs. level effect of population change on economic development: An inspection into human-capital-related mechanisms

This paper studies the different mechanisms and the dynamics through which demography is channeled to the economy. We analyze the role of demographic changes in the economic development process by studying the transitional and the long-run impact of both the rate of population growth and the initial population size on the levels of per capita human capital and income. We do that in an enlarged Lucas–Uzawa model with intergenerational altruism. In contrast to the existing theoretical literature, the long-run level effects of demographic changes, i.e. their impact on the levels of the variables along the balanced growth path, are deeply characterized in addition to the more standard long-run growth effects. We prove that the level effect of the population rate of growth is non-negative (positive in the empirically most relevant case) for the average level of human capital, but a priori ambiguous for the level of per capita income due to the interaction of three transmission mechanisms of demographic shocks, a standard one (dilution) and two non-standard (altruism and human capital accumulation). Overall, the sign of the level effects of population growth depends on preference and technology parameters, but numerically we show that the joint negative effect of dilution and altruism is always stronger than the induced positive human capital effect. The growth effect of population growth depends basically on the attitude to intergenerational altruism and intertemporal substitution. Moreover, we also prove that the long-run level effects of population size on per capita human capital and income may be negative, nil, or positive, depending on the relationship between preferences and technology, while its growth effect is zero. Finally, we show that the model is able to replicate complicated time relationships between economic and demographic changes. In particular, it entails a negative effect of population growth on per capita income, which dominates in the initial periods, and a positive effect which restores a positive correlation between population growth and economic performance in the long term.

Factor-eliminating technical change

Perpetual growth requires offsetting diminishing returns to reproducible factors of production. In this article we present a theory of factor elimination. For simplicity and clarity, there is no augmentation of non-reproducible factors, thus excluding the standard engine of growth. By spending resources on R&D, agents learn to change the exponents of a Cobb–Douglas production function. We obtain the economy's balanced growth path and complete transition dynamics. The theory provides a mechanism for the transition from an initial technology incapable of supporting perpetual growth to one with constant returns to reproducible factors that supports it.

Demography, growth, and inequality

We extend the single-sector endogenous growth model to allow for a general demographic structure. The model shows that due to the “generational turnover term,” the equilibrium growth rate is less than that of a representative agent model. We find the local dynamics about the balanced growth path (bgp) to be unstable, implying that the bgp is the only viable equilibrium. Using numerical simulations, we analyze how economic consequences of a change in the population growth rate differ, depending on the source of the demographic change. In addition, we analyze the relationship between changes in the demographic structure and what we call the “natural rate of wealth inequality”. Finally, we use our model to study how the demographic transition experienced by the United States has affected the economic growth rate and the degree of wealth inequality.

How Do Governments Set Public Deficits? A Note on Persistent Deficit, Growth, and Indeterminacy

In a recent paper Minea and Villieu (2012) present an endogenous growth model with productive public spending and government debt and assert that their model can generate multiple balanced growth paths. We show that their result is non-generic and point out where the error in their analysis is. In addition, we demonstrate that their deficit rule is a restrictive special case of a more general rule that has been frequently analyzed in economics, empirically and theoretically. This general rule gives rise to a richer dynamics in the sense that two saddle point stable balanced growth paths can ocur. In particular, the inter-temporal elasticity of substitution of consumption and the way how governments set the primary surplus are decisive as concerns the emergence of multiple balanced growth paths.

CAN EDUCATION BE GOOD FOR BOTH GROWTH AND THE ENVIRONMENT?

We develop an overlapping-generations model of growth and the environment in relation to public policy on education. Beyond the traditional mechanisms through which knowledge, growth, and the environment interplay, we stress the role played by education in environmental awareness. Assuming first that environmental awareness is constant, we show the existence of a balanced-growth path (BGP) along which environmental quality increases continually. Then, if education enhances environmental awareness, the equilibrium properties are modified: the economy can reach a steady state or converge to an asymptotic BGP. Therefore, education does not necessarily promote sustained and sustainable growth.

Intergenerational Complementarities in Education, Endogenous Public Policy, and the Relation Between Growth and Volatility

AbstractWe construct an overlapping generations model in which parents vote on the tax rate that determines publicly provided education and offspring choose their effort in learning activities. The technology governing the accumulation of human capital allows these decisions to be strategic complements. In the presence of coordination failure, indeterminacy and, possibly, growth volatility emerge. This indeterminacy can be eliminated by an institutional mechanism that commits to a minimum level of public education provision. Given that, in the latter case, the economy moves along a uniquely determined balanced growth path, we argue that such structural differences can account for the negative correlation between volatility and growth.

Human capital use, innovation, patent protection, and economic growth in multiple regions

We provide the first theoretical analysis of the effects of human capital use, innovative activity, and patent protection, on economic growth in a model with many regions. In each region, consumers have constant relative risk-aversion preferences, there is no human capital growth, and there are three kinds of manufacturing activities involving the production of blueprints for inputs (machines), the inputs themselves, and a single final consumption good. Our analysis generates four results. For any given region, we first describe the balanced growth path (BGP) equilibrium and show that the BGP growth rate depends negatively on the rate at which patents expire. Second, we characterize the transitional dynamics in our model. Third, we determine the value of the patent expiry rate that maximizes the equilibrium growth rate of a region. Finally, we show that a policy of offering perpetual patent protection does not necessarily maximize social welfare in a region.

Transitional Dynamics in a Multi-Sector Ramsey-Model with Non-Homothetic Preferences: Development Traps and Structural Change Feedbacks

Recent literature studies structural change in neoclassical multi-sector growth models. The literature focuses on the analysis of dynamic equilibriums (“aggregate balanced growth paths”). We study the transitional dynamics of a multi-sector Ramsey-model with non-homothetic preferences and inter-sector technology disparity. We show that the model converges to the aggregate balanced growth path only for a subset of feasible initial capital values (“convergent range”). Outside the convergent range the economy is in development traps. Within the convergent range the transitional dynamics are quantitatively different from the transitional dynamics of a standard one-sector Ramsey-model due to feedbacks between aggregate dynamics and structural change.

Human capital, knowledge spillovers, and one kind of semi-endogenous regional economic growth

We study the implications of the interaction between human capital and knowledge spillovers for one kind of semi-endogenous economic growth in a region. We focus on two cases. In the first (second) case, there is no growth (growth) in the stock of human capital but knowledge spillovers are complete (incomplete). Our analysis leads to four findings for each of the above two cases. First, we describe the balanced growth path equilibrium. Second, we describe the possible existence of transitional dynamics. Third, we discuss the circumstances in which there exists a human capital induced scale effect. Fourth, we discuss the real world plausibility of each of the above two cases. We conclude with a brief discussion of how our single region model might be extended to study the case of \(I\ge 2\) regions.

GROWTH AND FIRM DYNAMICS WITH HORIZONTAL AND VERTICAL R&D

A negative or nonsignificant empirical correlation between aggregate R&D intensity and the economic growth rate is a well-known fact in the empirical growth literature, but scarcely addressed in the theoretical growth literature. This paper develops an endogenous-growth~model that explores the interrelation~between horizontal and vertical R&D under a lab-equipment specification that is consistent with that stylized fact. A key feature is that the growth rate is fully endogenous both on the intensive and on the extensive margin. Strong composition effects between horizontal and vertical R&D, along both transition and the balanced-growth path, then emerge as the main mechanism producing those results. This setting also allows us to obtain a relationship between economic growth and firm dynamics that is consistent with the empirical facts.

Start-Up Banks’ Default and the Role of Capital

Regulation requires banks to hold a minimum capital endowment upon their establishment. But what role does initial capital play in a bank’s lifecycle? This paper addresses the issue for start-up banks. We use both survival-time and binary choice models for a sample of newly-established Italian banks in the period 1994-2006, controlling for a broad set of possible drivers of default, such as market, managerial and financial variables. Our results suggest that initial capital does play a leading role in explaining both the timing and the likelihood of a failure. Other important drivers are organisation and a balanced growth path, while market and management variables appear to play a minor role. We then turn to a quasi-experimental design: exploiting a regulatory shift in 1999 we run a counterfactual analysis of the impact of a regulatory tightening of initial capital, which affected only a subsample of banks. The set of results suggests that the effect on banks’ survival may be significant.

Human Capital, Knowledge Spillovers, and One Kind of Semi-Endogenous Regional Economic Growth

We study the implications of the interaction between human capital and knowledge spillovers for one kind of semi-endogenous economic growth in a region. We focus on two cases. In the first (second) case, there is no growth (growth) in the stock of human capital but knowledge spillovers are complete (incomplete). Our analysis leads to four findings for each of the above two cases. First, we describe the balanced growth path (BGP) equilibrium. Second, we describe the possible existence of transitional dynamics. Third, we discuss the circumstances in which there exists a human capital induced scale effect. Fourth, we discuss the real world plausibility of each of the above two cases. We conclude with a brief discussion of how our single region model might be extended to study the case of I ≥ 2 regions.

Optimal education and pensions in an endogenous growth model

It is well known that, in OLG economies with life-cycle saving and exogenous growth, competitive equilibria will in general fail to achieve optimality and may even be dynamically ineefficient. This is a consequence of individuals accumulating amounts of physical capital that differ from the level which would maximize welfare along a balanced growth path (the Golden Rule). With human capital, a second potential source of departure from optimality arises, to wit: individuals may not choose the correct amount of education investment. However, the Golden Rule concept, widely used in exogenous growth frameworks, has not found its way into endogenous growth models. In this paper, we propose to recover the Golden Rule of physical and also human capital accumulation. The optimal policy to decentralize the Golden Rule balanced growth path when there are no constraints for individuals to finance their education investments is also characterized. It is shown that it involves positive pensions and negative education subsidies (i.e., taxes).

A two-sector model of endogenous growth with leisure externalities

Abstract This paper considers the impact of leisure preference and leisure externalities on growth and labor supply in a Lucas (1988) [12] type model, as in Gomez (2008) [7] , with a separable non-homothetic utility and the assumption that physical and human capital are both necessary inputs in both the goods and the education sectors. In spite of the non-concavities due to the leisure externality, the balanced growth path is always unique, which guarantees global stability for comparative-static exercises. We find that small differences in preferences toward leisure or in leisure externalities can generate substantial differences in hours worked and growth, which may play a significant role in explaining differences in growth paths between the US and Europe, in addition to the mechanisms uncovered in Prescott (2004) [15] relying on differing marginal tax rates on labor income. Our model indicates, however, that a higher preference for leisure or leisure externality implies less growth but also less education attainment, which seems counterfactual.

Public Debt, Productive Public Spending and Endogenous Growth

We analyze effects of public debt in a basic endogenous growth model with productive public spending. We demonstrate that a discretionary policy violates the inter-temporal government budget constraint along a balanced growth path. A balanced government budget gives a unique saddle point stable growth path. With a rule based policy, two saddle point stable balanced growth paths can occur, depending on the inter-temporal elasticity of substitution of consumption and on the primary surplus policy. Higher debt goes along with smaller long-run growth and we derive a condition such that a deficit financed increase in public spending raises the growth rate.

Some Properties of the Technology Gap between Leading and Lagging Regions

We theoretically analyze some properties of the technology gap between leading and lagging regions studied recently by Batabyal and Nijkamp (2013). New technologies are developed in the leading region. The lagging region does not conduct research and development (R&D) but uses the leading region’s technology with a temporal gap of τ>0 time periods. We first use a model with a single factor of production, human capital, to study the relationship between the technology gap τ and the difference in the growth rates of output per human capital unit in the leading and in the lagging region. Next, we introduce a second factor of production, physical capital, and use a variant of the Solow growth model to shed light on two issues. We show that despite the existence of the technology gap, on the balanced growth path (BGP), the physical to effective human capital ratio is identical in both regions. Finally, we demonstrate that introducing a second factor of production does not alter the relationship between the technology gap τ and the difference in the growth rates of output per human capital unit in the two regions.

What can Latin-American Entrepreneurs learn from Catalan gazelles?

Purpose The purpose of this paper is to systematize the strategic capabilities of seven surviving industrial Catalan companies which were going through explosive growth in 1999. Design/methodology We use the comparative case studies method to draw on the common features among the seven in‐debt cases we built. We are well aware that the method of comparative case studies does not provide a sufficient base for bold generalizations. However, the qualitative approach adopted here allows for the first in‐depth look at the strategies that bring surviving entrepreneurs from explosive growth to a more balanced growth path. Findings We identify four organizational capabilities as key to the survival of these businesses ten years later: first, ability to prioritize product and market development, including internationalization, over operations; second, ability to reorganize internally and delegate in a timely manner; third, ability to manage innovation and support creativity linked to productivity; and finally, abi...

Monetary Policy after the Global Crisis

Post-crisis spillovers and heightened capital flows have triggered a search for alternative monetary policy frameworks, especially for small open emerging economies. The Turkish experience since the end of 2010 is an interesting case in this respect. Faced with extreme volatility in cross-border capital flows, rapid credit growth, and a sharp deterioration in the current account deficit, the Central Bank of Turkey (CBT) has modified the conventional inflation targeting regime by adopting financial stability as a supplementary objective and enriching the set of policy instruments. This study explains the underlying motivation behind why the CBT adopted such a flexible policy, provides an overview of the new framework, and summarizes the initial results. The analysis conducted throughout the paper and the recent evidence suggests that the new policy framework has been quite effective in engineering a soft landing of the Turkish economy in the sense that it has successfully shifted the composition of aggregate demand towards a more balanced growth path (rebalancing) without prejudice to the price stability objective.

Growth and welfare effects of monetary policy with endogenous fertility

This paper investigates the economic growth and social welfare implications of monetary policy in an endogenous growth model with endogenous fertility. We show that, in the money-in-the-utility-function framework, endogenous fertility governs the validity of money superneutrality, the transitional dynamics of an anticipated monetary policy, and the optimal monetary policy. Along a balanced growth path, monetary growth increases fertility and reduces the economic growth rate if consumption and real balances are complements or are independent. However, monetary expansion may decrease fertility and increase economic growth if consumption and real balances are substitutes. Generally speaking, the superneutrality of money does not hold in the presence of endogenous fertility. More importantly, with endogenous fertility, the Friedman (1969) rule is no longer a welfare-maximizing monetary policy. We also show that an anticipated inflation induces the transitional dynamics of fertility and the economic growth rate even though the intertemporal elasticity of substitution equals unity. This differs from the conventional notion in the existing literature.

Preference constraint for sustainable development

This paper defines a sustainable development path as a balanced growth path with environmental conservation. In the framework of endogenous growth theory, it is known that a sustainable development path is optimal only if the following three conditions are satisfied: (1) the engine of economic growth is clean; (2) the assimilation capacity of the environment is high enough to endure the increasing environmental load with economic growth; and (3) the population has an egalitarian propensity with the elasticity of the marginal utility of consumption that is greater than or equal to one. While all of these three conditions are intuitively plausible, there are distinctions between the first two and the last one: the former can be obtained by our endeavors, whereas the latter concerns preference that is endowed rather than obtained. We show that this preference constraint can be relaxed if the production technology satisfies the condition that the elasticity of transformation to the production factor and the environmental service, after appropriate monotone transformation, is greater than one.