Long-run Growth Rate Research Articles

Relative Wealth, Consumption Taxation, and Economic Growth

This paper examines the role of the relative wealth-induced status motive in affecting the neutrality of consumption taxation in an optimizing growth model. It is found that a key factor determining the validity of the neutrality of consumption taxation in both the level sense and the growth rate sense is the desire for relative wealth-induced social status. When individuals care about their relative wealth, a rise in consumption tax enhances the steady-state level of capital stock and consumption. Furthermore, if the production function takes a linear technology form as the engine of sustained growth, then increases in consumption taxation raise the economy's long-run growth rate. In addition, an optimal consumption tax policy provides full subsidies to consumption so as to induce the economy to achieve the social optimum and the optimal growth rate.

Fertility Choice and Semi-Endogenous Growth: Where Becker Meets Jones

We introduce fertility choice into an R&D-based semi-endogenous growth model so that the economy's long-run growth rate is again fully endogenously determined. The ultimate growth engine is located in the population equation of the model ("people reproduce in proportion to their number"), and R&D carries population growth forward to GDP growth. We indicate the problems stemming from the fact that in the considered class of models, population size ought to enter the utility functional multiplicatively. In particular, we show that second order optimality conditions need not hold and flow utility is required to be positive (levels of utility matter). A simplified "Barro–Becker–Jones" model which we put forward, reconciles these problems, yields a stable long-run fertility rate and thus an asymptotic BGP, and is open to further generalizations.

Expenditure Composition and Distortionary Tax for Equitable Economic Growth

This paper continues the study of optimal fiscal policy in a growing economy by exploring a case in which the government simultaneously provides three main categories of expenditures with distortionary tax finance: public production services, public consumption services, and state-contingent redistributive transfers. The paper shows that in a general equilibrium model with given exogenous fiscal policy, a nonlinear relation exists between the suboptimal long-run growth rate in a competitive economy and distortionary tax rates. When fiscal policy is endogenously chosen at a social optimum, the relation between the rate of growth and tax rates is always negative. These two conclusions suggest that the interaction between fiscal policy and growth may be complicated enough that it cannot be captured in a simple linear model using an aggregate measure of fiscal policy. The sources of nonlinearity include expectation and coordination of fiscal policy, impluse response of government policies, and the presence of positive externality due to government spending.

Expenditure Composition and Distortionary Tax for Equitable Economic Growth

This paper continues the study of optimal fiscal policy in a growing economy by exploring a case in which the government simultaneously provides three main categories of expenditures with distortionary tax finance: public production services, public consumption services, and state-contingent redistributive transfers. The paper shows that in a general equilibrium model with given exogenous fiscal policy, a nonlinear relation exists between the suboptimal longrun growth rate in a competitive economy and distortionary tax rates. When fiscal policy is endogenously chosen at a social optimum, the relation between the rate of growth and tax rates is always negative. These two conclusions suggest that the interaction between fiscal policy and growth may be complicated enough that it cannot be captured in a simple linear model using an aggregate measure of fiscal policy. The sources of nonlinearity include expectation and coordination of fiscal policy, impluse response of government policies, and the presence of positive externality due to government spending.

Trading places: Does past growth impact inequality?

Using a broad panel dataset and semiparametric methods, the impact of past economic growth on current income inequality is examined. Increases in past short-run or medium-run growth rates raise current inequality. However, there is an inverted “U”-shaped relationship between past long-run growth and current inequality. Increases in past long-run growth rates raise current inequality in slow-growing economies and reduce current inequality in rapidly growing economies.

Population effects of increased climate variation

Global circulation models predict and numerous observations confirm that anthropogenic climate change has altered high-frequency climate variability. However, it is not yet well understood how changing patterns of environmental variation will affect wildlife population dynamics and other ecological processes. Theory predicts that a population's long-run growth rate is diminished and the chance of population extinction is increased as environmental variation increases. This results from the fact that population growth is a multiplicative process and that long-run population growth rate is the geometric mean of growth rates over time, which is always less than the arithmetic mean. However, when population growth rates for unstructured populations are related nonlinearly to environmental drivers, increasing environmental variation can increase a population's long-run growth rate. This suggests that patterns of environmental variation associated with different aspects of climate change may affect population dynamics in different ways. Specifically, increasing variation in rainfall might result in diminished long-run growth rates for many animal species while increasing variation in temperature might result in increased long-run growth rates. While the effect of rainfall is theoretically well understood and supported by data, the hypothesized effect of temperature is not. Here, I analyse two datasets to study the effect of fluctuating temperatures on growth rates of zooplankton. Results are consistent with the prediction that fluctuating temperatures should increase long-run growth rates and the frequency of extreme demographic events.

Economic progress and skill obsolescence with network effects

We construct an OLG model with network effects to examine skill obsolescence when individuals can choose technological vintages. In the absence of transfer payments, some regions of the parameter space have unique stationary equilibria, others have unique cyclical equilibria, and others have multiple stationary equilibria. All equilibria are Pareto efficient. However, “rat race” equilibria can exist in which all agents currently alive prefer a slower rate of progress than occurs in equilibrium. When contemporaneous transfers are allowed, equilibria are unique everywhere, but a cycle still exists, and a rat race can still arise in equilibrium. Allowing intertemporal transfers (debt) ensures that all equilibria are stationary. In the relevant parameter range, the introduction of debt can eliminate cycles and increase the long-run growth rate. No rat race equilibria exist when debt is allowed.

The Grossman and Zhou investment strategy is not always optimal

Grossman and Zhou [1993. Optimal investment strategies for controlling drawdowns. Math. Finance 3, 241–276] proposed a strategy to maximize the asymptotic long-run growth rate of one's fortune F t subject to its never falling below λ sup 0 ⩽ t ′ ⩽ t F t ′ e r ( t - t ′ ) , where 0 ⩽ λ ⩽ 1 is a fixed constant chosen by the investor and r is a fixed, known, non-negative, continuously compounded interest rate on invested capital. In this paper we show that the strategy proposed in Grossman and Zhou does not retain its optimal long-run growth property when generalized to the discrete-time setting.

On taxation in a two-sector endogenous growth model with endogenous labor supply

This paper studies the effects of taxation on long-run growth in a two-sector endogenous growth model with (i) physical capital as an input in the education sector and (ii) leisure as an additional argument in the utility function. Income taxation – the same rate applies for capital and labor income – reduces the growth rate. The same is true if only labor income is taxed. However, if only capital income is taxed, the positive effect of an increase in total non-leisure time may dominate the direct negative effect, implying that capital taxation increases the long-run growth rate.

Population aging, the costs of health care for the elderly and growth

Employing an overlapping-generations model with endogenous growth in which altruistic young agents take care of the health level of their aged parents at risk of illness, this paper examines how population aging influences the long-run growth rate of the economy. We show that life expectancy, when relatively low (high), positively (negatively) affects economic growth. This paper also investigates public policy on long-term care and demonstrates the existence of an intergenerational conflict between current and future generations. We also point out that population aging may mitigate the extent of this conflict.

Uncertain Technological Change under Capital Mobility

textabstractThe analysis in this paper shows that unpredictable variations in economic productivity may have a positive or negative effect on the average growth rate of output. This theoretical ambiguity result is not solely determined by the value of the elasticity of intertemporal substitution (of consumption) - as is the case in earlier analyses - but depends on two factors. That is, the growth-uncertainty relationship depends on whether returns to scale in knowledge creation are increasing or non-increasing and whether the elasticity of intertemporal substitution (of profits) is higher or lower than some critical value. Empirical studies concerning these two factors indicate that unpredictable variations in economic productivity have a negative effect on the average long-run growth rate.

The Effect of Financial Development on Convergence: Theory and Evidence

We introduce imperfect creditor protection in a multicountry Schumpeterian growth model. The theory predicts that any country with more than some critical level of financial development will converge to the growth rate of the world technology frontier, and that all other countries will have a strictly lower long-run growth rate. We present evidence supporting these and other implications, in the form of a cross-country growth regression with a significant and sizable negative coefficient on initial per-capita GDP (relative to the United States) interacted with financial intermediation. In addition, we find that other variables representing schooling, geography, health, policy, politics, and institutions do not affect the significance of the interaction between financial intermediation and initial per capita GDP, and do not show any independent effect on convergence in the regressions. Our findings are robust to removal of outliers and to alternative conditioning sets, estimation procedures, and measures of financial development.

Vertical Diversity, Communication Gap and Equilibrium Growth

Abstract This paper examines the effect of vertical diversity in workers' skill on the long-run growth rate of an economy. It uses a two-sector model where the technology of the consumption-good sector is supermodular and that of the R&D sector is submodular. By adopting Grossman and Maggi's (2000) model to a framework of growth, it shows first that diversity is conducive to growth. As the main innovation, a notion of communication gap is introduced among workers. It is shown that if vertical diversity is sufficiently high relative to the communication gap, the growth rate may not increase with diversity; there may be an inverse-U shaped relationship.

The Effects of Expected and Unexpected Volatility on Long-Run Growth: Evidence from 18 Developed Economies

1. IntroductionAlthough there is disagreement about the magnitude, many economists agree that business cycles have negative consequences for welfare in the short run by causing output to deviate from potential. As a result, most policymakers regard reducing volatility as a desirable goal. However, there is disagreement about the long-run consequences of business cycles.Some models suggest that business cycle volatility should reduce long-run growth. In these models, increased volatility increases risk, reduces investment, and slows the growth rate of output. In addition, volatility may reduce the diffusion rate of new technology, which might reduce the long-run growth rate. Hence, business cycles have negative short-run consequences (by causing output to deviate from the trend) and negative long-run consequences (by slowing the long-run growth rate). If these models are accurate, then the welfare consequences of business cycles are more severe than previously thought.An alternative view of the growth-volatility relationship suggests that there may be a long-run benefit to business cycles. In these models, increased volatility stimulates inventive activity, which increases the long-run growth rate. Reduced volatility will be beneficial in the short run, but if reduced volatility decreases the long-run growth rate, then there are costs to stabilization. As a result, policymakers would face a trade-off between business cycle volatility and long-run growth. In addition, it is possible that the long-run costs of stabilization policy might exceed the short-run benefits.This article sheds new light on the growth-volatility relationship. First, this article focuses on two types of volatility: expected volatility and unexpected volatility. This allows a more thorough test of the two general hypotheses linking growth to volatility. Second, this article empirically examines the relationship between growth and volatility for 18 industrialized nations over a 110-year period. Therefore, the analysis avoids the problem of short time span of data.This article proceeds as follows. Section 2 clarifies the relationship between the competing hypotheses as well as between expected and unexpected volatility. Section 3 analyzes the growth-volatility relationship without making the distinction between expected and unexpected volatility. Section 4 uses generalized method of moments (GMM) and ordinary least squares (OLS) along with panel data to estimate the effects of expected and unexpected volatility on growth. Section 5 concludes with suggestions for further research.2. The Growth-Volatility RelationshipThe view that business cycle volatility reduces the long-run growth rate focuses on risk. Bernanke (1983), Ramey and Ramey (1991), and Pindyck (1991) argue that volatility creates risk about future demand and that firms are unlikely to invest in new plants and equipment if they are unsure about the demand for their product. The greater the volatility in output, the more uncertain future demand becomes; the greater the risk, and the less likely firms are to invest. This negative relationship between volatility and investment might lead to a negative relationship between growth and volatility: Increased volatility decreases investment, which then slows the growth rates of the capital stock and output. The effect would be especially pronounced if new technology is embodied in new capital goods. Ramey and Ramey (1995) and Macri and Sinha (2000) have found results consistent with this view of the growth-volatility relationship using aggregate data. This view emphasizes the risks associated with unexpected changes in output: When firms cannot accurately forecast the demand for their goods, they reduce capital expenditures, which reduces growth.The view that business cycles might increase long-run growth focuses on the opportunity cost of productivity-enhancing activities (PEAs). Bean (1990) and Saint-Paul (1993) view firms as solving an intertemporal profit-maximizing problem in which producing goods provides profits today but engaging in PEAs produces profits only in the distant future. …

Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions

We construct measures of the annual cost of single-family housing for 46 metropolitan areas in the United States over the last 25 years and compare them with local rents and incomes as a way of judging the level of housing prices. Conventional metrics like the growth rate of house prices, the price-to-rent ratio, and the price-to-income ratio can be misleading because they fail to account both for the time series pattern of real long-term interest rates and predictable differences in the long-run growth rates of house prices across local markets. These factors are especially important in recent years because house prices are theoretically more sensitive to interest rates when rates are already low, and more sensitive still in those cities where the long-run rate of house price growth is high. During the 1980s, our measures show that houses looked most overvalued in many of the same cities that subsequently experienced the largest house price declines. We find that from the trough of 1995 to 2004, the cost of owning rose somewhat relative to the cost of renting, but not, in most cities, to levels that made houses look overvalued.

The dynamics of economic integration: Theory and policy

Integration affects economic growth mainly through two different channels: The scale-effect channel and the factor-reallocation channel. In order to investigate both channels within a unifying framework, we employ a simple descriptive growth model. The scale-effect channel increases either the long-run growth rate or the level of the balanced growth path. The factor-reallocation channel is ambiguous. It is shown under which conditions this mechanism induces either a rise or a fall in the long-run growth rate. In addition, a number of policy conclusions are drawn.

Endogenous Growth, Capital Utilization and Depreciation

We study the one sector model of growth when a linear production technology is combined with adjustment costs and a technology for capital maintenance. Agents are allowed to under-use the installed capital and to vary the depreciation rate. This economy decides endogenously how much resources devotes to the accumulation of new capital and how much to maintenance and repair activities. We find as striking results that the long-run depreciation and capital utilization rates are positively related to the population growth rate, and that both depend negatively on the intial conditions. The long-run growth rate appears positively correlated with the depreciation rate.

Money, habits and growth

The money-in-utility model is re-considered with habits and endogenous growth. An increase in the inflation rate requires a fall in the steady state habits relative to capital, if initially the nominal interest rate is positive. If habits exhibit adjacent complementarity, immediately after the increase in the inflation rate savings and investment fall, reducing the growth rate. However, the long-run growth rate is not affected by the policy change. The long-run level of capital would be lower than it would have been had there been no increase in the inflation rate. These predictions are supported by our empirical evidence, and also reconcile some recent empirical evidence on inflation and growth.

Determinants of economic growth in Brunei Darussalam

This study analysed the factors that have influenced long-run economic growth in Brunei Darussalam using available data from government’s archives and publications. Multiple regression analysis based on a relatively new cointegration technique was used to construct a variant of the neoclassical growth model. This model was based on annual growth of real gross domestic product (GDP) as the dependent variable. The independent variables were the annual growth of total exports, government size measured as the ratio of total government expenditures with respect to GDP, total investment-GDP ratio, annual growth of labor and a dummy variable representing the effect of the 1997/1998 Asian financial crisis. The results showed that the growth of exports significantly influenced long-run economic growth rates as expected. The other main factor influencing long-run economic growth was the relative size of government. The relative size of government influenced long-run growth rate in the form of a cubic function. Large government sizes impeded economic growth while moderate government sizes enhanced economic growth.

IQ and the Wealth of Nations

This book is simple in conception. By taking estimates of IQ for almost every country in the world, and running these against per capita gross domestic product (GDP) data at various times since 1820, Lynn and Vanhanen show significant positive correlations both of absolute GDP per capita levels and of long-run rates of national economic growth against IQ. IQ is shown to be a powerful predictor of both these dependent variables, although not, of course, a monocausal explanation. By employing regression analysis, the authors isolate deviant data points, and try to explain why the individual countries they represent at these points in time deviated significantly from the expected trend-line values.