Neoclassical Growth Model Research Articles

Analyzing the impact of tax-based vs. rent-based funding on the effectiveness of environmental protection policies

The necessity of government intervention, particularly through public spending, to address market failure in providing public goods like environmental quality is widely recognized. However, the effectiveness of fiscal environmental policies in improving the environment remains unclear. This paper aims to explore the impact of funding sources for government expenditures on environmental quality. Using a Ramsey growth model, we investigate the consequences of two alternative funding sources for environmental protection: Taxes and natural resources rents. The model highlights that along the balanced growth path, financing environmental spending through taxes enhances environmental quality, while funding from natural resources rents leads to its deterioration. Furthermore, the model emphasizes the crucial role of socio-political institutions governing the economy in understanding the link between environmental protection expenditures and environmental outcomes. To test the model's propositions, we utilize a panel dataset of 76 countries spanning from 1995 to 2018. Our empirical findings corroborate the notion that the funding sources of environmental protection expenditures significantly impact environmental outcomes. Additionally, the results indicate that higher institutional quality, such as greater state capacity, enhances the effectiveness of the government's environmental spending in improving environmental quality. Our findings offer valuable insights for policymakers and researchers seeking to design effective strategies for environmental preservation and sustainable growth.

General equilibrium and dynamic inconsistency

We study the role of different sources of naivete in a general equilibrium version of the Ramsey model with quasi-hyperbolic discounting. When agents are aware of others’ naivete, as strongly suggested by empirical evidence, they revise consumption paths, correctly anticipating prices in a resulting sliding equilibrium (perfect foresight). When agents are unaware of others’ naivete, as is typically assumed in the theoretical literature, they revise both consumption paths and price expectations (quasi-perfect foresight). We prove the existence of sliding equilibrium under perfect foresight for the class of isoelastic utility functions. We show that generically quasi-hyperbolic discounting matters for saving behavior: sliding equilibrium under perfect foresight is observationally equivalent to some optimal path in the standard Ramsey model only if utility is logarithmic. By comparing sliding equilibria under different types of foresight we show that perfect foresight implies a higher saving rate, long-run capital stock and consumption level than quasi-perfect foresight.

The macroeconomics of hedging income shares

The debate about the falling labor share has brought attention to the income-shares trends, but less attention has been devoted to their variability. We analyze how their fluctuations can be insured between workers and capitalists, and the corresponding implications for financial markets. We study a neoclassical growth model with aggregate shocks that affect income shares and financial frictions that prevent firms from fully insuring idiosyncratic risk. We examine theoretically how aggregate risk sharing is shaped by the combination of idiosyncratic risk and moving shares. In this setting, accumulation of safe assets by capitalists and risky assets by workers emerges naturally as a tool to insure income shares' risk. Then, in a quantitative exploration we show that low interest rates, rising capital shares, and accumulation of safe assets by firms and risky assets by households can be rationalized by persistent shocks to the labor share.

Unemployment and the direction of technical change

I construct and analyze a growth model in which technical change can increase unemployment. I first analyze the forces that deliver a constant steady state unemployment rate in this setting. Labor-saving technical change increases unemployment, which lowers wages and creates incentives for future investment in labor-using technologies. In the long run, this interaction generates a balanced growth path that is observationally equivalent to that of the standard neoclassical growth model, except that it also incorporates a positive steady state level of unemployment and a falling relative price of investment. I also study the effects of a permanent increase in the ability of R&D to improve labor-saving technologies. In the long run, this change leads to faster growth in output per worker and wages, but it also yields higher unemployment and a lower labor share of income. In the short run, this change exacerbates existing inefficiencies and slows economic growth.

Public health events and economic growth in a neoclassical framework

Public health events (PHEs) have emerged as significant threats to human life, health, and economic growth. PHEs, such as COVID-19, have prompted a reevaluation for enhanced regular prevention and control (RPC). In this study, we focus on the core concept of prevention and control intensity (PCI), and establish a neoclassical economic growth model from the long-term and macro perspective to balance life protection and economic growth. The model construct the mechanism of PCI on economic growth through population dynamics and capital accumulation under the backdrop of RPC for PHEs. We find the conditions for PCI when the economy achieves steady state, and provides an algorithm establishing the optimal strategy that maximises per capita disposable income based on the optimal PCI and consumption. Simulation result quantifies an inverted U-shaped relationship between PCI and capital per capita, output per capita and consumption per capita in the steady state. The model suggests that, given the PHEs of inducing potential unemployment shock, it is worthwhile to combine the implementation of moderate PCI with coordinated policies of income distribution.

Almost periodic dynamics for a delayed differential neoclassical growth model with discontinuous control strategy

Abstract In this study, we are concerned with the existence and exponential stability issue of a delayed differential neoclassical growth model with discontinuous control strategy. By employing the Filippov’s theory and dichotomy theory, together with the Lyapunov functional method, novel criteria on existence and exponential stability are established for the addressed model. The established theoretical results extend and supplement the related results in the existing literature. Moreover, a simulation example is presented to verify the practicability of the proposed results.

ASSESSMENT OF PUBLIC DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES, TAKING INTO ACCOUNT THE STRUCTURE OF PUBLIC SPENDING AND INTERTEMPORAL CONSUMER BEHAVIOR

The paper estimates the sustainability of public debt in developing countries from 1990 to 2021 drawing on fiscal response function. The author proposes the modification of the Ramsey model that considers both saving behavior of the population and the structure of government spending in terms of their influence on fiscal policy effects. The findings are tested on the example of developing countries including the Russian Federation. We verify the model's conclusions in two stages. At the first stage, based on indicators of government expenditures’ structure and savings rate, we identify country clusters using the k-means method. At the second stage, for a certain groups of countries, we econometrically estimate the so-called fiscal response function, that is, the reaction of primary budget balance to debt accumulation in the previous period. We make estimates for panel data using a fixed effects model, as well as the generalized method of moments for a dynamic panel. Based on the estimates obtained, for a group of countries similar to Russia in terms of savings rates and the share of productive expenditures in the total share of government expenditures, there is a significant positive coefficient of the reaction of the primary budget balance to changes in public debt in the previous period. Thus, fiscal sustainability is achieved for the selected group of countries at the federal level during the period under review. However, risks at a regional level may, if events develop unfavorably, have a shock effect on the federal budget that requires an additional analysis of regional debt sustainability.

Uncovering the impact of cultural heritage on economic growth: empirical evidence from Greek regions, 2000–2019

This paper brings empirical evidence on the role of cultural heritage assets in promoting economic growth. The case of Greece at regional level over the period 2000–2019 is taken as an example, owing to important cultural heritage endowment. Economic growth is approached by formulating a neoclassical growth model augmented with a dynamic cultural heritage index. The relationship between economic growth and cultural heritage is examined through a heterogeneous and cross-correlated panel data analysis. The empirical results reveal a positive impact of cultural heritage endowment on economic growth. Also, a significant positive influence of physical capital and a negative impact of unemployment on the economy are evidenced. The conclusions drawn could be useful to regions and countries to upgrade their cultural heritage endowment to accelerate economic growth.

Optimal taxation of nonrenewable resources during clean energy transition: A general equilibrium approach

In this paper we study clean energy transition in a modified version of the Ramsey growth model by including nonrenewable and renewable resources as well as pollution externalities. The main difference from previous works is that we consider imperfect substitution between nonrenewable and renewable resources. We characterize the social optimum and show that the economy converges to a clean state in the long run. We then study the decentralized equilibrium and show that the economy converges to the same state even without regulation, but with higher environmental damage. Further, we investigate the properties of the taxation trajectory that drives the laissez-faire economy to follow the optimal path and show that it can be either increasing or decreasing over time. We identify different channels that influence the path of optimal taxation and show that it depends, among other things, on the level of capital, the cost of renewable energy and the degree of substitution between renewable and nonrenewable resources.

Consumption externalities, elastic labor supply and wealth distribution

This study employs a neoclassical growth model to investigate the impact of consumption externalities on the distribution of wealth. It also jointly accounts for heterogeneity in the degree of consumption externalities, heterogeneity in the initial wealth endowments, and endogenous labor supply. First, we demonstrate that catching-up occurs when an initially poorer household works more than an initially wealthier one, after which the additional income acquired through hard work offsets the initial wealth difference. Second, a reduction in wealth inequality is only consistent and systematic if an initially wealthier household works relatively less than the social average. When this condition is not met, a reduction in wealth inequality only occurs if the initial wealth is highly and unevenly distributed.

Financial Development and the Capital Flow Allocation Puzzle in Developing Asia

ABSTRACT Using a panel regression approach across 13 developing Asian economies from 1996Q1 to 2019Q4, this paper examines the extent of financial development as a transmission channel for mediating the “allocation puzzle” in capital flows. This puzzle pertains to why capital seems to flow to economies with lower rather than higher productivity growth. We find that while portfolio equity and debt investment flows are negatively related to total factor productivity (TFP) in developing Asia, thereby contradicting the predictions of traditional neoclassical growth models, financial development significantly mitigates this effect. This is particularly the case at earlier stages of financial development and convergence towards a frontier. For foreign direct investment, although we find that there is no direct allocation puzzle in developing Asia, financial development can hamper the stimulatory effect of TFP for highly financially developed economies given diminishing marginal returns.

The Ramsey Model's Insight on Long-Term Growth Amidst Brexit and the COVID-19 Pandemic

The Ramsey Model's Insight on Long-Term Growth Amidst Brexit and the COVID-19 Pandemic

A necessary and sufficient condition for the existence of chaotic dynamics in a neoclassical growth model with a pollution effect

A necessary and sufficient condition for the existence of chaotic dynamics in a neoclassical growth model with a pollution effect

The Effects of Foreign Direct Investment on Economic Growth (Gross Domestic Product) in Tanzania

This study aims to analyse the effects of Foreign Direct Investment on Economic Growth (Gross Domestic Product) in Tanzania. The World Bank’s data on foreign direct investment and gross domestic product from 1988 to 2021 was employed in order to achieve the purpose of the study. The Vector Autoregressive Regression (VAR) Model was selected, in which a neoclassical growth model was applied within the implementation of this model. According to the findings of the research that was carried out, the Gross Domestic Product was primarily influenced by its prior values, which suggests that the economy is capable of some degree of self-sufficiency in terms of driving changes in the economy. According to the findings, foreign direct investment had a relatively minimal direct impact on gross domestic product, which suggests that other factors played a more significant role in influencing economic performance. There was no bidirectional causal relationship between gross domestic product and foreign direct investment; they both functioned independently of one another. It has been established that endogenous shocks have a significant role in driving changes in both GDP and FDI, which underscores the impact that internal forces have on the economic system. The importance of taking into account internal factors while conducting an analysis of economic growth has been brought to light as a result of these findings, which have contributed to a better understanding of the complex relationship that exists between GDP and FDI.

Green logistics and circular economy in alleviating CO2 emissions: Does waste generation and GDP growth matter in EU countries?

The integration of Green Logistics (GL) and Circular Economy (CE) have been recognized as critical concepts for achieving sustainable economic and environmental performance. However, there is a lack of understanding on the combine impacts of CE and GL in alleviating CO2 emissions in pioneering nations relying on these concepts. This study examines the role of CE and GL sustainable in curbing CO2 emissions of 13 developed European Union (EU) countries from 2000 to 2020. The neoclassical growth and IPAT models, including the pool mean autoregressive distributed lags (PMG-ARDL) and the vector error correction model (VECM) are employed to estimate the short- and long-run effects and heterogeneous causal relationships. The long-run results reveal that CE and GL can mitigate CO2 (carbon dioxide) emissions, while the generation of municipal waste (GMW) has negative impact on the environment. Moreover, the long-run relationship between economic growth, CE, GL, and GMW validates the Environmental Kuznets Curve (EKC) hypothesis. The study also confirms a bidirectional causality between CE, GL, and CO2 emissions over the long run. This study proposes a model for assessing the impact of CE and GL initiatives on environmental performance and sustainability in both pioneering developed regions and emerging economies yet to embrace green growth concepts.

Reforming the Eurozone financial system: A system-dynamics approach

The effectiveness of the current monetary policy of the European Central Bank (ECB) in maintaining (price) stability in the eurozone is assessed using a system dynamic model. The model combines a neoclassical growth model with a stock-flow representation of the eurozone financial sector at a high level of aggregation. With endogenous money creation, the multidirectional relationship between asset prices and net income, and also the dual causality of both liquidity and investment relative to interest rates as the main features of the model, the developments of the past 50 years can be understood and extrapolated to 2050.The simulation experiments indicate that the current pro-cyclic system is inherently unstable. This instability can only be overcome by monetary policy that eases and tightens the total amount of money in the system in a countercyclical manner. An obvious way to achieve this is the introduction of 100% Central Bank Digital Currency (CBDC). This calls for the ECB's mandate to become the sole "monetary authority" that creates and controls the amount of money in the system, with the sole and unambiguous objective of price stability. Money creation to achieve price stability at a targeted level of inflation with simultaneous repayment of public debt varies between €200 billion and €500 billion per year. This money can be channelled into the real economy through the EU's governance structure and spent on tax cuts and/or direct public investments, for example in physical and social infrastructure.

Climate change, tipping points, and economics

This paper discusses the response of the economics profession to a possible occurrence of tipping points in natural systems, with a drop in welfare. For a climate tipping point, the hazard-rate model is relevant, and the paper shows that in a Ramsey growth model with climate tipping, the effect on policy is increased saving and increased taxation of greenhouse gas emissions. Climate change is often seen as a tragedy of the commons because incentives to deviate undermine cooperation and prevention of climate change. However, a climate tipping point can be prevented in a Nash equilibrium or with partial cooperation if the drop in welfare is sufficiently high. In case of uncertainty about the threshold, this result remains if the uncertainty is not too large. In the conclusion, the paper makes a few remarks on including tipping points in teaching environmental and resource economics.

Economic growth in the Balkan area: An analysis of economic β-convergence

The Balkan countries undergoing the transition must advance their economies to be more competitive. The aim of this paper is to analyse economic growth with a primary focus on the analysis of economic convergence in the Balkan region in the period of 1997–2020. The research analyses the following Balkan economies: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Greece, Montenegro, North Macedonia, Romania, Serbia, and Slovenia. This study applies Gross Domestic Product (GDP) as a measure of economic growth and is based on the neoclassical economic growth model: the Solow's convergence concept. The results show that the Balkan countries experienced economic convergence with a speed of 1.82% in the cross-sectional model and 7.87% in the panel data model. It means that the initially less developed economies noted higher economic growth than those richer.

THE RELATIONSHIP BETWEEN GEOGRAPHY AND ECONOMIC GROWTH IN MIDDLE-INCOME COUNTRIES: EVIDENCE FROM PANEL DATA ANALYSIS

All countries aim to achieve stable economic growth. Geography is recognized as one of the main determinants of economic growth as it covers the advantages and disadvantages arising from the physical location of the country. For this reason, revealing the relationship between geography and economic growth can give an idea about the economic policies that can be implemented in terms of how to utilize the advantages or how to reduce the effects of disadvantages. In addition, analyses on the effects of geographical location, climate, natural resources and other geographical characteristics on economic growth help to understand the economy from a broad perspective. This study, using panel data analysis methods with data from 2001-2012, aims to empirically test the relationship between geography and economic growth among 79 countries classified at middle income level according to the World Bank income classification. In line with this objective, various empirical tests were carried out using panel data analysis method. The empirical analyses conducted within the scope of the study revealed that geographical factors are effective on economic growth. Therefore, the inclusion of geographical factors, which are generally ignored by neoclassical growth models, will provide an important perspective for economic growth studies.

An Empirical Study on the Relationship Between Energy Transformation and Economic Growth – Based on Ramsey Model

The study analyzed the interactive relationship between energy transformation and economic growth through the Ramsey model. The energy factor was introduced as an independent factor into the Ramsey model and an application improvement design was carried out. From a micro perspective, the impact of energy and economic factors on net output was analyzed. The research results indicate that the estimated coefficients of fossil energy output elasticity, labor output elasticity, capital output elasticity, and renewable energy output elasticity are 0.740602, 0.708407, 0.454672, and 0.304065, respectively. In addition, the significance tests were all below 0.05, indicating significance. Meanwhile, the elasticity of capital output and labor output complement each other; The output elasticity of fossil fuels and renewable energy are also complementary to each other. In a complementary relationship, the downward trend of one element is often accompanied by the upward trend of another element. This study sorts out the interactive relationship between energy transformation and economic growth, pointing out the direction for the future development of China’s energy economy.