Equilibrium Growth Path Research Articles

A growth model with endogenous technological revolutions and cycles

We propose a new approach to deal with continuous time dynamic model with discontinuity, by which we incorporate gradual innovations and technological leaps, as well as endogenous cycles and long-run growth into one framework. We show that the optimal or equilibrium growth path is a cyclic growth path (CGP) and we develop the mathematical technique to prove the existence and uniqueness of the solution. We provide two basic setups to include the technological leaps in the R&D sector or goods production sector respectively. The growth paths under these two setups show different cyclic features and abundant economic dynamics. Our approach can be easily utilized to evaluate the optimality of the timing of the technological revolution. In the decentralized economy, the technological breakthrough is exogenous to families and always happens too late. The social planner’s problem clarifies two fundamental effects on the optimal growth path, i.e., the “dividend effect” and the “swot-up effect”, induced by discontinuous technological change. Our framework can also serve as a workhorse to address dynamic economic problems with discontinuity.

Capital Demand Driven Business Cycles: Mechanism and Effects

We develop a tractable macroeconomic model that captures dynamic behaviors across multiple timescales, including business cycles. The model is anchored in a dynamic capital demand framework reflecting an interactions-based process whereby firms determine capital needs and make investment decisions at the micro level. We derive equations for aggregate demand from this micro setting and embed them in the Solow growth economy. As a result, we obtain a closed-form dynamical system with which we study economic fluctuations and their impact on long-term growth. For realistic parameters, the model has two attracting equilibria: one at which the economy contracts and one at which it expands. This bi-stable configuration gives rise to quasiperiodic fluctuations, characterized by the economy's prolonged entrapment in either a contraction or expansion mode punctuated by rapid alternations between them. We identify the underlying endogenous mechanism as a coherence resonance phenomenon. In addition, the model admits a stochastic limit cycle likewise capable of generating quasiperiodic fluctuations; however, we show that these fluctuations cannot be realized as they induce unrealistic growth dynamics. We further find that while the fluctuations powered by coherence resonance can cause substantial excursions from the equilibrium growth path, such deviations vanish in the long run as supply and demand converge.

Speed of Navigation vis-a-vis Quality of Innovation as Sources of Progression towards Steady State Equilibrium: Insights and Inferences

This study formally and theoretically juxtaposes `speed of navigation' of the general equilibrium growth path (equivalently, a `low-high' innovation system), and `quality of innovations' (equivalently, a `top-down' innovation system) as alternate strategies for minimization of the time it takes for a country to arrive at its general equilibrium steady state growth phase. Formal theoretical predictions show that, whereas the speed of navigation strategy has feasibility of outperforming the quality of innovations strategy, superior performance at minimization of time to steady state is feasible only in presence of either of errors of implementation of the top-down innovation system, or incapacity of an economy at generation of high quality innovations. In absence of stated two factors, the quality of innovations strategy outperforms the speed of navigation strategy for minimization of the time it takes for a country to arrive at its general equilibrium steady state growth phase. Empirical findings provide corroboration for study findings, provide evidence that whereas the speed of navigation strategy generates a linear approach, the quality of innovations strategy generates a weakly convex approach to the general equilibrium steady state growth phase. Quality of elementary education is `poster boy' for the quality of innovations strategy. Simultaneously, size of stock markets and fixed capital formation are poster boys for the `speed of navigation' strategy.

A Rubric for Estimation of Efficiency of Progression on a General Equilibrium Growth Path

This study develops a formal theoretical rubric for estimation of the efficiency with which a country progresses on its general equilibrium growth path towards its steady state growth phase. Empirical tests confirm robustness of the metric, and show, contrary to assumptions of growth theory that, in most countries, between 10 and 70 percent of GDP Per Capita growth is generated not by technical change that is induced by innovations, but by any or all of 'demand-pull entrepreneurship', rent seeking, and crony capitalism. This finding yields the important implication that innovation systems of many developed countries inherently are unable to cater to growth demands that are implied by population levels and standards of living. Inequality then is traceable, in part at least, to inadequacies of countries' innovation systems. Empirical findings yield the insight that whereas countries ought to be engaged in searches for highest quality innovations (i.e. 'top-down innovation systems'), most countries are engaged with innovation strategies in context of which they attempt to leverage higher quality innovations on 'already existing' innovations (i.e. 'low-high innovation systems'). Given low-high innovation systems reward incumbency, there is arrival at innovation systems that stifle, rather than stimulate arrival of new types of innovations, with outcome dependence on any or all of demand-pull entrepreneurship, rent seeking, or crony capitalism is exacerbated. Consistent with superiority of top-down innovation systems, all sample countries, which adopt the innovation system progress efficiently on the general equilibrium growth path.

The Trouble with Harrod: The fundamental instability of the warranted rate in the light of the Sraffian Supermultiplier

AbstractThe paper argues that Harrodian instability is an instance of what Hicks in his book Capital and Growth (1965) called static instability, related to the direction (and not to the intensity) of the disequilibrium adjustment process. We show why such instability obtains in demand‐led growth models in which the ratio of capacity creating private investment to output ratio is given exogenously by the aggregate marginal propensity to save. We also show that Sraffian Supermultiplier model overcomes the Harrodian instability and that its demand‐led equilibrium is statically stable. It is explained that the latter results do not follow from the presence of autonomous non‐capacity creating expenditure component as such but from its presence within a model in which investment is driven by the capital stock adjustment principle (i.e., the flexible accelerator). Finally, we argue that, although being statically stable, the equilibrium growth path of the Sraffian Supermultiplier model can be dynamically stable or unstable depending on the intensity of the reaction of investment to demand. We then provide a discrete time sufficient condition for the dynamic stability of such equilibrium that implies that the marginal propensity to invest remains lower than the marginal propensity to save during the adjustment process, a modified Keynesian stability condition.

China's Regional Factor Substitution Elasticity and Economic Growth: Stochastic Frontier Production Function Analysis from a Perspective of Heterogeneous Labor

This paper employs provincial panel data from 1996 to 2014 to construct regional stochastic frontier production function model, and extends the analysis of factor substitution elasticity from the perspective of labor heterogeneity. And then it combines co-integration model and error correction model for the first time to reveal the effect of factor substitution constraints on economic growth from the perspectives of long-term equilibrium and short-term volatility, and further advance & deepen growth effect study of factor substitution elasticity.It shows that there are significant differences in the changes in substitution elasticity among the three major regions, but the growth effects of factor substitution elasticity are consistent mutually. Among them, the capital-labor substitution elasticity in the eastern region clearly has a growth threshold of 0.805; only the capital-labor substitution elasticity in the western region crosses the threshold value, it does not have significantly positive correlation with regional growth, thus supporting the De La Grandville hypothesis; the promotion roles of the increase in capital-skills complementarity among the three major regions in economic growth are not obvious, but the labor-skills substitution elasticity is manifested as a significant positive growth effect, although its growth coefficient is relatively small, still it shows that there are human capital dividends in these regions. It is worth noting that, different from the De La Grandville hypothesis that capital-labor substitution elasticity can promote economic growth in equilibrium growth path, when considering labor heterogeneity and technical inefficiency, China's regional growth is more supportive of the conclusion that the increase in labor-skills substitution elasticity can improve economic growth. This paper further lays foundation on screening regional growth potential transformation under new normal, and analyzing the rationality of factor matching & the feasibility of industrial structure adjustment.

Housing and Economic Growth Nexus in Nigeria: Data Based Evidence

Housing is considered as one of the cardinalmeasures of the state of an economy. This paperemployed data-based evidence to explore housingsector-economic growth relationship in Nigeriaduring 1980-2015. Choice variables were realestate business services (REBS), building constructioninvestments (BCI), property rights index(PRI) and human labor (L) engaged in the sector.Anchored on perceived interactions amongthe variables, articulated conceptual modelpreceded an analytic model modifi ed from theendogenous growth model of economic theory.Graphical and econometric techniques were employedto analyze the data sets on the variablesfor trends in time series values of the variables;and the effects of the housing sector variableson growth of the economy. The results showedthat housing services delivery had long-run relationshipand signifi cantly spurred growth of theeconomy. Further, housing services delivery andgrowth of the economy had high speed adjustmentcoeffi cient to long-run equilibrium growthpath under stable structural housing sector servicesdelivery and appropriate human labor mixparticipation. Therefore, the paper concludedthat housing services enhanced growth of theeconomy, and emphasized the need for appropriatehuman, capital and fi nancial policies forthe sector to engender sustainable growth anddevelopment of the Nigerian economy.

The Dynamics of Growth and Income Inequality under Progressive Taxation

AbstractThis paper develops an endogenous growth model having a progressive income tax structure in which heterogeneous agents, who differ in terms of their rates of time preference, supply labor elastically. We analyze the dynamic adjustment to an increase in progressivity and show that the economy will converge to an equilibrium growth path with nondegenerate distributions of both income and wealth. The role of the endogeneity of labor supply is emphasized and shown to have a major impact on the nature of the transitional path, as a result of the impact of the progressive tax on agents’ work incentives. Our theoretical analysis is supplemented with, and supported by, numerical simulations, which generally match the empirical evidence rather closely. We also show that the responses of the different income groups contrast sharply from one another so that focusing on the economy‐wide average provides an incomplete picture.

Understanding regional growth dynamics in Japan: Panel co-integration approach utilizing the PANIC method

This study proposes a panel co-integration approach using the PANIC method for understanding the regional growth dynamics using non-stationary panel data, and applies it to Japanese prefectures. This approach enables us to analyze both long-run equilibrium growth path and short-run dynamics across the regions. Specifically, we find that there is one common source of growth to which prefectures attach different weights, that the per capita real income of follower-prefectures will catch up to that of leader-prefectures, and that temporal fluctuations of the catch-up process elicited by Barro type regression qualitatively corresponds to short-run dynamics across prefectures by the PANIC method.

Testing Solow’s Implications on the Effective Development Policy

The core of the neoclassical growth theory is the capital investment. Solow proposed that the diminishing return is key to such growth process in establishing the stability of the equilibrium growth path. This key postulation has critical implications on the sustainable and effective development policies, emphasizing the importance of productivity growth not only for the steady-state growth but also for the transitional growth from capital accumulation. This paper suggests a novel way to test the diminishing return, the backbone assumption of Solow model, and confirms its strong presence using the Penn World Tables version 8.0 data, hence validates Solows implications on effective development policies.

Testing Solow's Implications on the Effective Development Policy

The core of the neoclassical growth theory is the capital investment. Solow proposed that the diminishing return is key to such growth process in establishing the stability of the equilibrium growth path. This key postulation has critical implications on the sustainable and effective development policies, emphasizing the importance of productivity growth not only for the steady-state growth but also for the transitional growth from capital accumulation. This paper suggests a novel way to test the diminishing return, the backbone assumption of Solow model, and confirms its strong presence using the Penn World Tables version 8.0 data, hence validates Solows implications on effective development policies.

Public infrastructure, production organization, and economic development

We develop a political economy model of growth to examine economic development led by the interactions between an economic decision concerning a firm’s production technology (CRS vs. IRS technology) and a political decision concerning public infrastructure. We show that multiple equilibrium growth paths occur due to differences in expectations regarding the quality of public infrastructure. These multiple paths illustrate why economies with poor initial conditions can catch up to and, furthermore, overtake economies with better initial conditions. Our result could explain the experiences of some East Asian countries where the co-evolution of public infrastructure and industrial transformation spurred economic development.

Defense Strategy Transition and Economic Growth Under External Predation

This paper develops a growth model for a country under a Hobbesian environment with international conflicts where national defense is the only way to prevent external predation. Different defense strategies result in different growth paths. The long-run growth path is determined by the equilibrium of a dynamic game with three players: the external predator, the government, and the family. The equilibrium growth path can have different phases: submissive equilibrium, tolerant equilibrium, and complete protection equilibrium. Sustainable growth will endogenously induce an adjustment of the defense strategies. As the economy keeps growing, complete protection will eventually be preferred. The optimal growth path prefers to compress the length of the transitional period between incomplete protection and complete protection. Some interesting features of the transitional dynamics are exhibited by a control model with discontinuity.

ECONOMIC REFORMS, HUMAN CAPITAL, AND ECONOMIC GROWTH IN INDIA AND SOUTH KOREA: A COINTEGRATION ANALYSIS

By employing a multivariate time series model, this study advances theoretical and empirical research on the role of economic reforms and human capital accumulation in the post-reform economic growth. We construct two indexes －a human capital index and a composite economic reform index－ and perform a cointegration analysis of a long-run equilibrium growth path in India and South Korea twelve years after the implementation of reform. The significant positive effect of human capital accumulation is revealed in both India and South Korea. The impact of economic reforms is found to be heterogeneous across countries: the effect is positive, significant, and sizable in South Korea, while it is negative and relatively small in India. This result is suggestive of different degrees of efficiency of reform measures implementation in two countries.

Economic Reforms, Human Capital, and Economic Growth in India and South Korea: A Cointegration Analysis

By employing a multivariate time series model, this study advances theoretical and empirical research on the role of economic reforms and human capital accumulation in the post-reform economic growth. We construct two indexes - a human capital index and a composite economic reform index - and perform a cointegration analysis of a long-run equilibrium growth path in India and South Korea twelve years after the implementation of reform. The significant positive effect of human capital accumulation is revealed in both India and South Korea. The impact of economic reforms is found to be heterogeneous across countries: the effect is positive, significant, and sizable in South Korea, while it is negative and relatively small in India. This result is suggestive of different degrees of efficiency of reform measures implementation in two countries.

Economic growth, structural change, and search unemployment

Economic growth is driven by structural change. Structural change does not come without a cost. The most evident social cost of structural change is high and persistent unemployment. This paper develops a model with an endogenously expanding service sector, where the constant flow of workers in and out of employment leads to structural unemployment. The main finding is that the level of unemployment is different between the initial period and the long-run equilibrium growth path, and that along the transition path, the level of unemployment will overshoot its equilibrium level, which can explain the long-run pattern of unemployment in most industrialized countries.

Economic Growth, Structural Change, and Search Unemployment

Economic growth is driven by structural change. Structural change does not come without a cost, the most evident social cost being high and persistent unemployment. This paper develops an economy with an endogenously expanding service sector, where the constant flow of workers in and out of employment relation leads to structural unemployment. The main finding is that the level of unemployment is different between the initial period and the long-run equilibrium growth path, and that along the transition path, the level of unemployment will overshoot its equilibrium level, which can explain the long-run pattern of unemployment in the industrialized countries.

CREDIT AND GROWTH UNDER LIMITED COMMITMENT

We consider a linear growth model with idiosyncratic productivity shocks in which producers cannot commit to repay their loans. Borrowing constraints are determined endogenously by the borrowers' incentives to repay, assuming that defaulters lose a share of output and are excluded from future trade in the credit market. We characterize necessary and sufficient conditions for the enforceability of a first-best equilibrium growth path. Weak property rights, impatient producers, and small productivity differentials can make the efficient growth path nonenforceable and lead to an inefficient equilibrium with binding borrowing constraints. For some economies, multiple balanced growth paths coexist.

UNIQUENESS AND INDETERMINACY OF THE EQUILIBRIUM GROWTH PATH IN THE UZAWA-LUCAS MODEL WITH SECTOR SPECIFIC EXTERNALITIES

We introduce sector specific external effects of human capital on production in an otherwise Uzawa-Lucas model of endogenous growth; and show that the problem of indeterminacy of the competitive equilibrium growth path does not exist even if the production function satisfies the increasing returns to scale at the social level.

A theory of competitive industry dynamics with innovation and imitation

Empirical evidence on industry life-cycle reveals a pattern in which innovation rates remain fairly stable or are perhaps even higher at early stages, while patenting increases sharply as the industry matures. This increase in patenting in later stages is accompanied by net exit and lower rates of output growth and price decline. In this paper, we develop a dynamic model of a competitive industry with innovation and imitation that is consistent with these stylized facts. We derive an equilibrium growth path, along which leading firms invest in increasing the stock of technological knowledge and choose not to prevent imitation by other firms as long as the industry remains relatively small. As the industry expands including new entry, the leaders' optimal amount of investment gradually declines. We show that under some rather general conditions, there would exist a scale of the industry where innovating firms would choose to start preventing free imitation, bringing further expansion of the industry through new entry to a halt and causing net exit.