Long-run Growth Rate Research Articles

An Engelian model of growth and innovation with hierarchic consumer demand and unequal incomes

The paper develops an endogenous growth model which is based on lexicographical consumer preferences. The central variable determining the long-run rate of growth is personal income distribution. Its role in the process of growth depends crucially on the assumption about productivity growth. If productivity grows proportionally to product diversity, then an unequal distribution of incomes, measured by the rate of proportion of top to average incomes, has a positive effect on growth. However, under alternative assumptions, for instance, if productivity is a function of average income, inequality turns out to be harmful for economic growth.

"Once-off" and Continuing Gains from Trade

Most economists are familiar with the static or once-off welfare gains created by opening an economy to trade. Much less is known about how the resource reallocations necessitated by this move affect long-run growth, and hence whether they provide dynamic or continuing welfare gains in future periods. This paper employs a dynamic trade model to provide a decomposition of the gains from trade into once-off' and continuing categories. In one version of the model, trade is always welfare enhancing; in the other, once-off losses may occur alongside dynamic gains. In both versions the magnitude of once-off and continuing effects are related to absolute and relative country size, similarity in production structures, rates of time preference, and the productivity of RD moreover, I link the magnitude of these gains to absolute and relative country size, similarity in production structures, the productivity of R&D, and the strength of time preference. I address these questions within the growth model developed in Taylor (1991). The model is created by imbedding the one-factor Quality Ladders model of Grossman and Helpman (1991a) within the continuum model of Dornbusch, Fischer and Samuelson (1977).' Because of the model's features, comparative and absolute advantage play a leading role in determining the size of both once-off and continuing gains from trade. Because of the model's endogenous growth features, access to larger world markets and trade-induced specialization in spurs economic growth. I use two versions of the basic model to examine the positive and normative consequences of international trade. In the Footloose R&D version I show that free trade is always preferred to autarky because trade creates both an immediate and onceoff level rise in instantaneous utility and an increase in its long-run rate of growth. In the Traditional Ricardian version I show that immediate and once-off losses may occur, but provide conditions under which there is a strong presumption in favour of overall gains. Recent work in this area has only considered the welfare consequences of a marginal movement towards autarky from free trade via small tariffs (Grossman and Helpman

Risks of Population Extinction from Demographic and Environmental Stochasticity and Random Catastrophes.

Stochastic factors affecting the demography of a single population are analyzed to determine the relative risks of extinction from demographic stochasticity, environmental stochasticity, and random catastrophes. Relative risks are assessed by comparing asymptotic scaling relationships describing how the average time to extinction, T, increases with the carrying capacity of a population, K, under each stochastic factor alone. Stochastic factors are added to a simple model of exponential growth up to K. A critical parameter affecting the extinction dynamics is $$\tilde r,$$ the long-run growth rate of a population below K, including stochastic factors. If r̃ is positive, with demographic stochasticity T increases asymptotically as a nearly exponential function of K, and with either environmental stochasticity or random catastrophes T increases asymptotically as a power of K. If r̃ is negative, under any stochastic demographic factor, T increases asymptotically with the logarithm of K. Thus, for sufficiently large populations, the risk of extinction from demographic stochasticity is less important than that from either environmental stochasticity or random catastrophes. The relative risks of extinction from environmental stochasticity and random catastrophes depend on the mean and environmental variance of population growth rate, and the magnitude and frequency of catastrophes. Contrary to previous assertions in the literature, a population of modest size subject to environmental stochasticity or random catastrophes can persist for a long time, if r̃ is substantially positive.

On Endogenizing Long-Run Growth

This assessment of recent theoretical work on endogenous growth identifies three different engines of long-run growth: (i) the asymptotic average product of capital is positive; (ii) labor productivity increases as an external effect of capital accumulation; (iii) there are feedback effects on the cost of accumulating knowledge or innovating. A general model encompassing all three is considered, and then used to review different proposed determinants of long-run growth rates. The contribution of endogenous growth theory has been to create a framework in which to explain why economic institutions and policies can have long-run effects on growth rates.

Tax structure and growth in a model with human capital

The effect of the tax structure on the long-run growth rate of income and consumption is analyzed, where tax structure refers to the mix of taxes on physical and human capital which satisfy an exogenously given government budget constraint. The factor used intensively in the consumption good sector, relative to the capital goods sector as a whole, is taxed more highly in a growth-maximizing tax structure. An endogenous labor supply, the tax treatment of depreciation and the effect of replacing the income tax with a consumption tax are all considered.

The trade-off between environmental care and long-term growth—Pollution in three prototype growth models

The effects of increased environmental care on optimal technology choice and long-term growth are studied for an economy in which pollution is a side-product of physical capital used in production. First, it is shown that in case of a standard neoclassical production structure, the result is a less capital-intensive production process whereas the long-run growth rate is not affected. Next, we introduce assumptions of the endogenous growth literature. When there are constant returns to physical capital, an increase in abatement activities crowds out investment and lowers the endogenous growth rate. When human capital accumulation is the engine of growth, physical capital intensity declines and the endogenous optimal growth rate is unaffected by increased environmental care or is even higher, depending on whether or not pollution influences agents' ability to learn.

Endogenous growth and income distribution

A theory of endogenous growth is based on an investment possibility function, relating the growth rate of output to the ratio of gross investment to output and the growth rate of employment as formulated originally by M. F. Scott. Consumers maximize an intertemporal utility function and producers maximize the value of the firm. The long-run rate of growth depends on consumer preferences, the exogenous growth of labor supply and the tax rate on output. The functional distribution of income is determined along with the investment ratio in the steady state. Labor market imperfections and real wage inertia induce transition processes, which are relevant for medium term growth.

Bien-être, croissance et système de retraite

We first briefly survey the literature adressing the issues of savings in the life-cycle, the links between the pension system, the savings rate and labor supply, and more generally the nature and causes of transfers between generations. The choice of the pension system has an influence on savings and consumption, hence on capital accumulation and welfare. Starting from the existing research on the choice of the optimal system and level of pensions, we illustrate the different points (choice between a capitalized or a pay-as-you-go system, optimal level of pensions, effects of demographic changes) using an endogenous growth model with overlapping generations. In our model, changes in income induce changes in the investment in human capital of wage earners, hence changes in the long-run growth rate.

Corporate hierarchy, promotion, and firm growth: Japanese internal labor market in transition

This paper investigates the incentive systems and the hierarchical design of the Japanese firms as integral parts of employment structure. Using the survey cross-section data on job ranks and wages, we analyze the promotion policy and compensations system as the key incentive mechanism in these firms with highly developed internal labor markets. We find that the incentive as well as hierarchical structures of the large Japanese firms are highly sensitive to the longrun growth rates of these firms. This finding is supported by a prediction of a model of internal promotions developed in the paper. We also find that the span of control, incentive effects of promotion, and wage-age profile at each job rank are all increasing in the longrun growth rates of these firms. These findings are jointly consistent with and in support of the hypothesis that the expected gains from the promotion is the key incentive in inducing efforts of the employees.

Money, growth, distribution and prices in a simple Sraffian economy

It is well known that relative prices are determined by the profit rate in a Sraffa model. This paper follows Sraffa's suggestion about the determination of the profit rate: it closes the Sraffian model with a monetary sector. It is shown that the Central Bank, through its control of money supply growth, influences the profit rate and thus the long-run distribution of income and relative prices. Furthermore, it is shown that in a Ricardo-Von Neumann-Lewis world, the Central Bank controls the long-run growth rate of the economy.

Endogenous Growth and Government Debt

The feasibility of the policy of perpetual debt financing, given a particular path for expenditures and taxation, has been questioned over the years. Sargent and Wallace [17] argue that such a policy is not feasible in the sense that the debt/GNP ratio will explode. McCallum [8] and Darby [2] argue that this policy will be feasible if and only if the long-run growth rate of GNP exceeds the after-tax real interest rate. This particular condition was derived under the assumption of Ricardian equivalence, where the growth rate of GNP and the interest rate are exogenously given, and are not affected by the path of debt. Miller and Sargent [9] and Weil [20] make the point that once the assumption of Ricardian equivalence is dropped, then simple comparisons of long-run growth rates and interest rates are not sufficient to determine stability. Tirole [19] and O'Connell and Zeldes [10] demonstrate in Diamond's [3] model, without Ricardian equivalence, that Ponzi games such as this are feasible if and only if the economy is dynamically inefficient without debt. All of these studies assume that the long-run growth rate of GNP is exogenously given. This assumption is particularly strong in the absence of Ricardian equivalence. In a separate literature, a new generation of equilibrium growth models has recently been developed with positive sustained growth in the long-run equilibrium. In these models, long-run growth is endogenously determined, rather than being imposed on the model as some exogenously given process [7; 11; 12; 14; 15].1 All of these models find some way of introducing increasing returns to scale into the neoclassical growth model and yet preserving the fact that it can be interpreted as a decentralized equilibrium. This paper considers the feasibility of perpetual debt financing in an economy where the growth rate of GNP is endogenously determined and is a function of debt levels. The model of endogenous growth presented here is a modified version of the one given in Prescott and Boyd [12]. This particular model is chosen for two reasons. First, agents live for finite lengths of time; so Ricardian equivalence will not hold, in general, in this model. Also, the production function is linear in the capital stock; as will become clear below, this implies that the equilibrium paths of the state variables can be characterized as first order linear difference equations.

Growth and distribution

Interest in the determinants of the rate growth of different economies is as old as our subject itself Book III of Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations was subtitled ‘Of the different Progress of Opulence in different Nations’. But the systematic formal modelling of growth took as its inspiration the proposition of Harrod (1939) and Domar (1946) that a steady-state rate of growth was feasible only in fortuitous circumstances. It was based on three main assumptions. First, the amounts of capital and labour needed to produce a unit of output are given by technological requirements. In particular, the capital-output ratio, denoted by u, is a technological constant. Second, the fraction of net income in the economy that is saved, denoted by s, is fixed. Finally, potential output from given inputs of capital and labour grows at an exogenous rate determined by technical progress. Labour supply, the only non-produced input, also grows at an exogenous rate. Hence the only feasible long-run steady-state rate of growth is the rate of technical progress plus the rate of population growth, the ‘natural’ rate of growth denoted by n. Stochastic shocks to potential output are ignored in this model. Much of equilibrium growth theory has been devoted to understanding the conditions necessary for individual saving and investment decisions to be compatible with the levels implied by the natural growth rate. An equilibrium growth path is one along which planned net saving equals planned net investment. Denote the current level of output by Y and the expected change in output by AK Planned saving is equal to the product of the saving ratio and the level of net output, sk: Planned investment is equal to the product of the capital-output ratio and the expected change in output, IJAY The expected growth rate of output is AY/Y and in equilibrium this is equal to s/v from the condition that planned saving equals planned investment. When

Endogenous macroeconomic growth theory

The paper focuses on the innovation-based approach to endogenous growth. It begins by spelling out conditions for sustained long-run growth in neoclassical economies and uses these conditions as a standard of comparison for the conditions required to sustain long-run growth in economies with product innovation. It presents two models of product innovation that can sustain growth in the long run. The models share the same fundamental mechanism of economic growth. They are used to derive a variety of implications relating structural features to long-run growth rates and they are then applied to a number of policy issues. The usefulness of the approach represented by these models is examined by considering a number of issues, such as unemployment and trade relations.

Why Does the Stock Market Fluctuate?

Major long-run swings in the U. S. stock market over the past century are broadly consistent with a model driven by changes in current and expected future dividends in which investors must estimate the time-varying long-run dividend growth rate. Such an estimated long-run growth rate resembles a long distributed lag on past dividend growth, and is highly correlated with the level of dividends. Prices therefore respond more than proportionately to long-run movements in dividends. The time-varying component of dividend growth need not be detectable in the dividend data for it to have large effects on stock prices.

Endogenous Product Cycles

We construct a model of the product cycle featuring endogenous innovation and endogenous technology transfer. Competitive entrepreneurs in the North expend resources to bring out new products whenever expected present discounted value of future oligopoly profits exceeds current product development costs. Each Northern oligopolist continuously faces the risk that its product will be copied by a Southern imitator, at which time its profit stream will come to an end. In the South, competitive entrepreneurs may devote resources to learning the production processes that have been developed in the North. There too, costs (of reverse engineering) must be covered by a stream of operating profits. We study the determinants of the long-run rate of growth of the world economy, and the long-run rate of technological diffusion. We also provide an analysis of the effects of exogenous events and of public policy on relative wage rates in the two regions.

Economic Integration and Endogenous Growth

In a world with two similar, developed economies, economic integration can cause a permanent increase in the worldwide rate of growth. Starting from a position of isolation, closer integration can be achieved by increasing trade in goods or by increasing flows of ideas. We consider two models with different specifications of the research and development sector that is the source of growth. Either form of integration can increase the long-run rate of growth if it encourages the worldwide exploitation of increasing returns to scale in the research and development sector. I. INTRODUCTION Many economists believe that increased economic integration between the developed economies of the world has tended to increase the long-run rate of economic growth. If they were asked to make an intuitive prediction, they would suggest that prospects for growth would be permanently diminished if a barrier were erected that impeded the flow of all goods, ideas, and people between Asia, Europe, and North America. Yet it would be difficult for any of us to offer a rigorous model that has been (or even could be) calibrated to data and that could justify this belief. We know what some of the basic elements of such a growth model would be. Historical analysis (e.g., Rosenberg [1980]) shows that the creation and transmission of ideas has been extremely important in the development of modern standards of living. Theoretical arguments dating from Adam Smith's analysis of the pin factory have emphasized the potential importance of fixed costs and the extent of the market. There is a long tradition in trade theory of using models with Marshallian external effects to approach questions about increasing returns. More recently, static models with fixed costs and international specialization have been proposed that come closer to Smith's description of the sources of the gains from trade [Dixit and Norman, 1980; Ethier, 1982; Krugman, 1979, 1981; Lancaster, 1980]. There are also dynamic models with fixed costs and differentiated products in which output

Macroeconomic Policies and Long-Term Growth: A Conceptual and Empirical Review

This paper reviews the theoretical and empirical aspects of the relationship between macroeconomic policies and the long-run rate of growth of GNP. The macroeconomic policies examined include fiscal policies, monetary and interest rate policies, external policies, and policies to reform the goods and labor markets, including adjustments of producer prices and wages. In general, the effects of these policies on growth operate directly or indirectly through their influence on investment in physical and human capital, and on factor productivity. The available empirical evidence confirms the effects of specific macroeconomic and financial policies on long-run growth.

Macroeconomic Policies and Long-Term Growth: A Conceptual and Empirical Review

This paper reviews the theoretical and empirical aspects of the relationship between macroeconomic policies and the long-run rate of growth of GNP. The macroeconomic policies examined include fiscal policies, monetary and interest rate policies, external policies, and policies to reform the goods and labor markets, including adjustments of producer prices and wages. In general, the effects of these policies on growth operate directly or indirectly through their influence on investment in physical and human capital, and on factor productivity. The available empirical evidence confirms the effects of specific macroeconomic and financial policies on long-run growth.

A Convex Model of Equilibrium Growth: Theory and Policy Implications

Our aim in this paper is to exposit a convex model of equilibrium growth. The model has two features that distinguish it from most other work on the subject: first, that the model is convex on the technological side, and second, that fixed factors are explicitly included. Existence and characterization results are provided along with some preliminary analyses of taxation and international trade policies. It is shown that the long-run growth rate in per capita consumption depends, in the natural way, on the parameters describing tastes, technology, and policies. It is demonstrated that in a free-trade equilibrium with taxation, national growth rates of consumption and output need not converge.

Bull and Bear Markets in the Twentieth Century

The bull and bear markets of this century have suggested that large stock market swings reflect irrational “fads and fashions.” We argue instead that investors perceived shifts in the long-run rate of future growth and that stock prices are sufficiently sensitive to expectations about the future that these perceived shifts plausibly generated the swings of the twentieth century. We document that analysts often viewed as “smart money” assessed fundamentals, based on their perceptions of future economic growth, in a way that tracked decade-to-decade swings closely.