Long-run Output Research Articles

From Fossil to Future: The Transformative Role of Renewable Energy in Shaping Economic Landscapes

In recent years, numerous countries have embarked on a transformative journey to reshape their energy portfolios by transitioning from fossil-based resources to renewable sources, significantly impacting economic growth. This study aims to scrutinize the influence of renewable energy consumption (REC) on GDP growth responsiveness in the top 20 renewable energy-consuming countries over the period from 1990 to 2021. To ensure robust panel analysis, the study addresses cross-sectional dependence using the diagnostic test proposed by Pesaran (2004). The long-run perspective reveals that both conventional factors of production, encompassing both renewable and non-renewable energy (Fossil Fuel Energy - FEF) consumption, make positive contributions to GDP growth in the sampled countries. Single-country time series analyses further underscore the positive long-run output elasticities concerning renewable energy in the majority of these nations. These findings highlight the pivotal role of renewable energy as a key determinant of sustained GDP growth, indicating that these countries are on a trajectory of sustainable development. The study's implications extend to policy considerations, urging collaborative efforts among governments, international organizations, and energy planners. There is a pressing need for the implementation of strategic renewable energy initiatives across nations. Governments are encouraged to adopt incentive-based policies to optimize the harnessing of renewable energy resources, fostering not only economic growth but also contributing to the global pursuit of sustainable and environmentally conscious practices.

Exploring climate change resilience of major crops in Somalia: implications for ensuring food security

ABSTRACT The complex relationship between climate change and major crop output poses urgent challenges for contemporary food production systems. Recognizing the diverse responses of different crops to climatic stressors, it is necessary to investigate the repercussions of climate-induced shifts in various crop yields. Focused on the adverse extreme weather impacts on food security, this research employs multiple specifications to assess the effects of climate change on major crops—maize, sorghum, rice, wheat, sugarcane, bananas, and beans—in Somalia using annual data spanning 1991–2019. The empirical findings from the autoregressive distributed lag (ARDL) approach reveal that increasing precipitation positively impacts the long-run output of sorghum, sugarcane, and banana while adversely affecting bean production. Conversely, changing temperatures detrimentally affect the long-run output of sorghum, rice, and beans, although they enhance rice and sorghum production in the short-run. Intriguingly, the study reveals that greenhouse gas (GHG) emissions and crop-harvested areas significantly enhance the yields of various crops. Moreover, agricultural labour positively impacts bananas while hampering other crop outputs. Based on these results, the study proposes the adoption of climate-resilient crop varieties, investment in irrigation infrastructure, enhanced weather prediction and early warning systems, as well as the promotion of sustainable land management.

Robot revolution and human capital accumulation: implications for growth and labour income

AbstractWe develop a model of endogenous growth with automation to study the impact of industrial robots on growth and labour income. We incorporate human capital accumulation into that framework to examine the role of human capital in sustaining growth without displacing low-skilled labour. While automation replaces low-skilled labour with industrial robots in conducting routine tasks, horizontal innovation creates new varieties in which low-skilled labour has an employment advantage. Labour-augmenting technology takes place to improve productivity of low-skilled labour. As such, those latter types of innovation help counterbalance the adverse effect of automation on low-skilled labour. Human capital, the essential production factor that takes part in every economic activity, including conducting non-routine tasks, accumulates over time through education and training. We show that there exists a long-run equilibrium at which either robots or low-skilled workers are employed, together with human capital, to produce varieties. In the fully endogenous model, final output grows at the rate of human capital accumulation. An improvement in the quality of education and training leads to an acceleration of both automation and variety expansion, but not human capital growth. Our numerical exercise indicates that a permanent increase in automation entails a permanent impact on the range of automated varieties, long-run output level and human capital wage. The shock lowers long-run growth and low-skilled workers’ wage and their effective income share. However, it has no effect on the effective income share of human capital.

Measuring the Output Gap using Large Datasets

Abstract We propose a new measure of the output gap based on a dynamic factor model that is estimated on a large number of U.S. macroeconomic indicators and which incorporates relevant stylized facts about macroeconomic data (comovements, nonstationarity, and the slow drift in long-run output growth over time). We find that (1) from the mid-1990s to 2008, the U.S. economy operated above its potential and (2) in 2018:Q4, the labor market was tighter than the market for goods and services. Because it is mainly data-driven, our measure is a natural complementary tool to the theoretical models used at policy institutions.

Open Economy Neoclassical Growth Models and the Role of Life Expectancy

AbstractThis paper applies the Ramsey–Cass–Koopmans (RCK) growth model to an open economy so that, when calibrated with standard parameter values that are commonly used in the small open economy macroeconomic literature, the time paths of the model variables and the speeds of convergence implied by the model conform with empirical evidence. Open-economy versions of the RCK growth model lead to several counterfactual conclusions including: infinite speeds of convergence for physical capital and output; and unbalanced consumption and asset growth. We avoid these undesired results by extending the baseline model with human capital, international credit constraints, and finite horizons. Given its finite-horizons feature, our model allows us to study the growth implications of changes in life expectancy from the perspective of an open economy, as most of the existing theoretical-quantitative literature that focus on the relationship assumes a closed economy. The model predicts that increased life expectancy has positive but diminishing marginal effect on long-run output per capita. We find that, between 1960 and 2018, improvements in average life expectancy at birth raised long-run output per capita in sub-Saharan Africa, the OECD region, and Canada by an estimated 57.49 %, 14.94 %, and 11.58 %, respectively. In addition, if average life expectancy at birth in sub-Saharan African countries converges from its current level to the level in their OECD counterparts, the region’s long-run output per capita will increase by an estimated 22.89 %.

The macroeconomic influence of the government's reduction of taxation in a closed economy

As the world's economies develop, governments always use economic policies to achieve specific economic objectives like decreasing the unemployment rate, improving economic growth, maintaining price stability, and deteriorating the current deficit. Also, tax changes could be one of the standard government policies. Moreover, with the changing taxation in a closed economy, some variables must be influenced. For example, the output and the rate of employment might change. This essay synthesizes several pieces of literature to discover the impacts on output and employment if the state cuts taxes. Based on these works, employment could rise when the government reduces the tax, the short-run output might increase, and the long-run output will be stable. Furthermore, economists may utilize these findings to make better national financial plans.

Simulating Tax Effects on Economic Activities in Sierra Leone: A DSGE Framework

"In order to analyse the macroeconomic effects of changes in the marginal tax rate on cyclical fluctuations in Sierra Leone, we created a DSGE model that evaluates the macroeconomic impact of three tax instruments (i.e., consumption, income, and capital). The model is calibrated with parameter values that reflect the peculiarities and representative tax structure of the Sierra Leone economy. We found that; a 5% increase in consumption tax rate causes a distortionary effect on output, consumption, and investment (in the short-run), while in the long-run output contract by 3.1%, with a permanent decline in consumption and investment. Whilst, fiscal revenues increase in the dynamic short run, 15%, higher than it previous steady-state value. On the other hand, a simulation of a 5% reduction in consumption tax, labour income tax, and capital income tax from the current rates shows a positive impact on consumption and investment as such output grows permanently by 8.45%, but fiscal revenues decrease marginally by 1.7%. The key point in the analysis is that in Sierra Leone tax changes have distortionary effects on the decisions of individuals and firms, affecting output, investment, consumption, and fiscal revenues. As such tax policy can alter economic behaviour in profound ways. We observed that fluctuations in tax rates produce large substitution effects that alter investment & consumption decisions and have distortionary effect on the behaviour of economic agents. The results suggest that the authorities should synchronize policies to manage the trade-off between the desire for more welfare gains, output growth, and the need for more fiscal revenue mobilization."

The extent of downward nominal wage rigidity: New evidence from payroll data

We use over a decade of representative payroll data from Great Britain to study the nominal wage changes of employees who stayed in the same job for at least one year. We show that basic hourly pay drives the cyclicality of marginal labour costs, making this the most relevant measure of wages for macroeconomic models that incorporate wage rigidity. Basic hourly pay adjusts much less frequently than previously thought in Britain, particularly in small firms. We find that firms compress wage growth when inflation is low, which indicates that downward rigidity constrains firms' wage setting. We demonstrate that the empirical extent of downward nominal wage rigidity (DNWR) can theoretically cause considerable long-run output losses. Combined, our results all point to the importance of including DNWR in macroeconomic and monetary policy models.

The macroeconomic effects of funding U.S. infrastructure

This paper quantitatively assesses the macroeconomic effects of the recently agreed U.S. bipartisan infrastructure spending bill in a general equilibrium model with a mix of neoclassical and new-Keynesian features. We add to the relevant literature by allowing for a more detailed tax structure, different types of infrastructure spending and linkages between the final and intermediate goods sectors. We find long-run output multipliers above unity if the rising public debt, triggered by the increase in infrastructure spending, is stabilised by rises in consumption, dividend and labour income taxes and less than unity for corporate taxes. We also find that self-financing rates associated with infrastructure spending are not generally above 50% despite underprovided private and particularly public capital. Finally, a sensitivity analysis reveals that intersectoral linkages and zero-interest rate policy are critical determinants of multiplier size.

Macroeconomic and distributive effects of increasing taxes in Spain

I assess the macroeconomic and redistributive effects of tax reforms aimed at increasing tax revenue in Spain. To this end, I develop a theory of entrepreneurship that mimics key facts on the wealth and income distribution in Spain. I find two reforms that raise fiscal pressure in Spain to the average value among countries in the Euro area. The first reform involves doubling the average effective tax rate on labor and business income for all individuals whose income is above a threshold level. I find that this reform reduces the inequality in after-tax income, wealth, and consumption. However, it implies a substantial GDP reduction. The second reform increases the flat tax rate on consumption by fifteen percentage points. While this reform does not reduce long-run output, it does not decrease household inequality. All in all, the desirability of the two reforms depends on the government’s preferences for reducing inequality at the expense of aggregate output losses.

Output determination and autonomous demand multipliers: An empirical investigation for the US economy

This paper aims to assess whether shocks in demand and its components can affect short- and long-run output dynamics, challenging the macroeconomic literature that relegates its effects to the short run. We apply SVAR modelling to US quarterly data (1954–2020) in order to identify shocks and compute multipliers associated with demand and its autonomous components (i.e. exports, government expenditure, credit-financed consumption, and private residential investment) while controlling for monetary policy. Our findings suggest that: (i) demand produces long-lasting effects on GDP with multipliers greater than one; (ii) multipliers are higher for credit-financed consumption and private residential investment, followed by government expenditure and exports; (iii) monetary policy affects output through residential investment. Our results support those theories suggesting that supply accommodates to demand by varying installed capacity and that monetary policy is ineffective in stimulating economic activity due to the low responsiveness of GDP to interest rate shocks.

Heterogeneity in the long-run remittance-output relationship: Theory and new evidence

The existing literature focuses extensively on the macroeconomic impact of remittances. Yet, the plausible heterogeneity in the remittance-output relationship is understudied. Different country characteristics and mediating factors of remittances suggest that the remittance-output relationship may vary across countries. Uncovering this cross-country heterogeneity can help tailor country-specific policies in managing the aggregate effects of remittances. We use panel data for 80 developing countries over 1970–2014 to systematically study the heterogeneous long-run remittance-output relationship. We find that an increase in remittances is associated with a marginal increase in long-run output on average. This, however, conceals a large cross-country heterogeneity, which uncovers that the impact of remittances on output varies from 0.59% in Dominican Republic to −0.53% in Bosnia and Herzegovina. Differences in the size/sign of the impact of remittances on consumption and investment across countries explain this variation. This cautions against a one-size-fits-all argument for the aggregate impact of remittances.

Implications of Human Capital Formation on Output and Employment: Evidence from Nigeria

Many studies have documented that human capital formation is important to boost output both empirically and theoretically. However, studies on the implications of human capital on employment are still scanty, especially for developing countries. Against this background, the study investigates the shock and long-run implications of government financing on education and health on output and employment in Nigeria using a vector error correction model (VECM). The results show that the forecasting error shocks from government expenditure on health and education affect output more than employment along the 10-horizon period. Evidence from the long-run output model showed that government expenditure on education and human capital index is statistically significant, while government expenditure on health is not statistically significant. Government expenditure on education and the human capital index has a positive relationship with output. For the long-run employment model, government expenditure on health and education is statistically significant; while investment in human capital is not significant with employment. Government expenditure on education has a negative relationship with employment, while a positive relationship exists between government expenditure on health and employment. The result implies that human capital indicators in terms of quantity and quality do not contribute positively and significantly to employment growth in Nigeria. The study recommends the need to encourage self-reliance through entrepreneurship training to bolster employment opportunities in the long run.

Strengthening climate prevention through economic globalization, clean energy, and financial development in N11 countries: evidence from advance panel estimations

This study evaluates the relevancy of economic globalization, financial development, and clean energy, in strengthening the environmental sustainability of the next 11 economies over a time period pertaining to 1995–2018. In order to achieve the objective of this study, the advanced panel estimation techniques of unit root testing, and the cointegration analysis have been applied due to the presence of the cross-sectional-dependence and heterogeneity of the slope parameters in the panel data. The long-run output coefficients have been estimated through the Cross-Sectional Autoregressive Distributive Lag Model (CS-ARDL). Moreover, the causality test for a heterogeneous panel has also been employed in order to determine the causal relationships among the variables that are under study. Our empirical findings of these tests indicate that financial development and economic globalization tend to contribute to the deterioration of environmental quality, but clean energy is productive for its improvement. The bi-directional causal relationship is recognized to exist between CO2 emission and all the variables. Based on these findings, the study recommends adopting economic growth policies that are aligned with the defined environmental regulations, thus promoting the use of more clean energy resources. These include resources such as renewable energy and incorporating the environmental welfare goals into financial development plans in N11 economies.

A Historical and Econometric Analysis of Energy Consumption and Industrial Output in Pakistan (1990-2019)

This paper examines the nexus of disaggregated energy consumption and industrial output in Pakistan. The annual time series data over the period 1990-2019 has been taken for current research. ARDL technique has been employed for empirical analysis. The results show that oil consumption, electricity consumption and gas consumption are positively and significantly connected with the industrial output in long run. Similarly, trade openness, labour and capital also have the same association with the industrial output and have significant outcomes in the long run. The results of Granger causality show that there exists a unidirectional causality from electricity consumption to industrial output. The study concludes that oil, gas and electricity are contributing a large share in industrial growth so that it would be made an effort to install the plants relevant with these energy sources to meet the affordable demand in the industry sector.

CHILDREN’S LEARNING ENVIRONMENT AND GROWTH-PROMOTING INCOME REDISTRIBUTION

Bénabou [(2002) Econometrica 70, 481–517.] demonstrated how progressive redistribution mitigates unequal opportunity for education to promote growth. We ask how effective that policy is when it affects the average quality of education. So, we add a learning externality in his model of human capital accumulation. It captures how knowledge diffusion through global channels—such as a national educational curriculum—influences children’s learning outcomes and, hence, growth. Whether inequality is a curse or a blessing for economic growth depends on how efficiently an economy designs these channels and to what extent they influence children’s education. The greater this efficiency, the lower is the optimal progressiveness of income redistribution for maximizing the long-run output growth rate. Interestingly, if poorly designed global channels exert greater influence in education, the optimal progressivity may increase. Our quantitative analysis reveals new implications for redistributive policies, including a surprisingly low optimal progressivity (approximately 6–7%) for the calibrated US economy.

Re-opening after the lockdown: Long-run aggregate and distributional consequences of COVID-19

Covid-19 has dealt a devastating blow to productivity and economic growth. We employ a general equilibrium framework with heterogeneous agents to identify the tradeoffs involved in restoring the economy to its pre-Covid-19 state. Several tradeoffs, both over time, and between key economic variables, are identified, with the feasible speed of successful re-opening being constrained by the transmission of the infection. In particular, while more rapid opening up of the economy will reduce short-run aggregate output losses, it will cause larger long-run output losses, which potentially may be quite substantial if the opening is overly rapid and the virus is not eradicated. More rapid opening of the economy mitigates the increases in both long-run wealth and income inequality, thus highlighting a direct conflict between the adverse effects on aggregate output and its distributional consequences.

Using COVID-19 mortality to select among hospital plant capacity models: An exploratory empirical application to Hubei province

This contribution defines short- and long-run output- and input-oriented plant capacity measures and evaluates them relative to convex and nonconvex technologies. By applying these different plant capacity concepts, the authors seek to measure the use of existing capacities, as well as the evolution and build-up of extra hospital capacity in the Chinese province of Hubei during the outbreak of the COVID-19 epidemic in early 2020. Furthermore, medical literature has established that mortality rates increase with high capacity utilization rates, an insight that this study leverages to select the most plausible of eight plant capacity concepts. The preliminary results indicate that a relatively new, input-oriented plant capacity concept correlates best with mortality.

Endogenous Growth, Skill Obsolescence and Fiscal Multipliers

We analyze the effects of government spending in a New-Keynesian model with search and matching frictions featuring endogenous growth through learning-by-doing and skill loss from long-term unemployment. We show that medium-run and long-run output and unemployment multipliers are much larger compared to the standard model that abstracts from endogenous growth and skill loss.In our model the aggregate effect of a temporary fiscal stimulus is amplified via the skill loss channel through lower training costs. Via the learning-by-doing channel, it leads to hysteresis in human capital accumulation and thereby output. These results hold for alternative forms of fiscal financing (lump-sum tax, distortionary tax and government debt) as well as alternative labor market institutions (US and Europe).

Can Monetary Policy Create Fiscal Capacity?

Governments around the world have gone on a massive fiscal expansion in response to the Covid crisis, increasing government debt to levels not seen in 75 years. How will this debt be repaid? What role do conventional and unconventional monetary policy play? We investigate debt sustainability in a New Keynesian model with an intermediary sector, realistic fiscal and monetary policy, endogenous convenience yields, and substantial risk premia. During an economic crisis of the same magnitude as the 2020 Covid recession, increased government spending and lower tax revenue lead to a large rise in government debt and raise the risk of future tax increases. We find that quantitative easing (QE) and a higher inflation target contribute to lowering the debt/GDP ratio and reducing the risk of future tax increases. QE is state- and duration-dependent: while a temporary QE policy deployed in a crisis stimulates aggregate demand, permanent QE crowds out investment and lowers long-run output.