Neoclassical Growth Theory Research Articles

A synthesis of the Uzawa-Lucas model with the Walrasian-General-Equilibrium and Neoclassical-Growth theories

This paper proposes a dynamic economic model of wealth accumulation and human capital accumulation with endogenous education. It is an extension of the Uzawa-Lucas model of a heterogeneous household economy with multiple ways of human capital accumulation. In addition to learning by education in the Uzawa-Lucas model (Uzawa, 1965; Lucas, 1988), we also consider Arrow?s ?learning by producing? (Arrow, 1962) and Zhang?s ?learning by consuming? (creative learning, Zhang, 2007) in the human capital accumulation equation. The economic system consists of one production sector and one education sector. Households differ in propensity to save, to obtain education, to consume, and in learning abilities. The model describes a dynamic interdependence between wealth accumulation, human capital accumulation, and division of labour with endogenous wealth and income distribution in perfect competition. We simulate the model to demonstrate the existence of equilibrium points and the motion of the dynamic system. We also demonstrate how changes in the propensity to obtain education, the population, the propensity to save, and the education sector?s total productivity affect economic development.

The History Augmented Solow Model

Unified growth theory predicts that the timing of the fertility transition is a key determinant of contemporary comparative development, as it marks the onset of the take-off to sustained growth. Neoclassical growth theory presupposes a take-off, and explains comparative development by variations in (subsequent) investment rates. The present analysis integrates these two perspectives empirically, and shows that they together constitute a powerful predictive tool vis-a-vis contemporary income differences.

Does the Mafia suppress entrepreneurship in Italy?

A great divide exists within Italy: the North is prosperous while the South remains relatively poor. The divide has persisted and regions have failed to converge, contradicting neo-classical growth theory. With this in mind, the following research aims to contribute toward the dialog pertaining to the divide and its persistence by discussing Mafia presence and entrepreneurship. Little has been done to establish a solid relationship between entrepreneurship and Mafia presence, and even fewer studies have been conducted utilising a solid measurement of Mafia presence that can be used for meaningful discourse. Using probit and ordered probit to obtain marginal effects, the research shows that Mafia presence has no sound relationship with entrepreneurial desire, yet has a significantly negative one with entrepreneurial outlook. The research exposes a pattern of discouragement and suggests that Mafia presence suppresses entrepreneurship; limiting the amount of firms and investment that flows through communities in the South. Policy makers should enact policy and increase enforcement to quell Mafia expansion and reduce Mafia presence in areas already under control.

Infrastructure and economic growth in Peru

This article reviews the literature analysing the importance of infrastructure for economic growth, and performs an econometric estimation to discover the relation between the two variables in the case of Peru. Different estimators are used with panel data from the 24 regions of Peru for the period 1980-2009. The econometric results confirm that public-service infrastructures (roads, electricity and telecommunications) are important in explaining temporary differences in regional output, in keeping with neoclassical exogenous growth theories. Evidence is also found of significant differences in the repercussions of the different infrastructures on per capita gdp in each region. Consequently, the policy authorities should streamline the development of projects that help to reduce the infrastructure disparities that hinder the development of Peru’s regions.

'Solvency rule' versus 'Taylor rule': an alternative interpretation of the relation between monetary policy and the economic crisis

One of the more debated interpretations of the economic crisis that started in 2007–08 is based on the ‘Taylor rule’ equation, namely the idea that over the period 2002–05 the Fed has implemented a low-interest policy that has led to the housing bubble and finally to the ‘Great Recession’. This paper shows that the Taylor rule equation not only rests on the so-called ‘new consensus macroeconomics’, but also on the neoclassical theory of growth. The various criticisms raised against these theoretical foundations suggest that interpretations of the Great Recession based on the Taylor rule equation are building their arguments on shaky theoretical premises. Furthermore, this paper shows that an equation formally similar but logically alternative to the Taylor rule can be regarded as the expression of a general condition of solvency of firms and workers. According to this ‘solvency rule’ the prevailing outcome of monetary policy decisions is the ‘regulation’ of insolvencies.

Total Factor Productivity and Cross-Border FDI Flows in OECD Countries - A Panel Data Econometric Analysis

The role of FDI inflows and outflows to host countries and from the source countries emerged in the 1980s as the major vehicle technology transfer that accelerated the globalization or international integration of 25 leading OECD economies over a period of 25 years (1983-2007). Although neoclassical and endogenous growth theories provide unequivocal support for FDI flows because they generate positive externalities or spillover effects through channels of GDP growth, capital formation and R&D, the empirical evidence in support of these claims are mixed. The panel data econometrics performed using a new multiplicatively complete index of total factor productivity provide fresh insights on the cross-border FDI generated through technology transfer and other channels. The empirical findings for the OECD countries are markedly different from the spillover effects on developing countries that are plagued by technology absorptive capacity effects due to the operation of threshold effects of underdeveloped human capital resources. The empirics on cross-border FDI flows and the spillover effects that they generate in OECD countries will provide much needed information to design and implement policies to harness the net benefits from cross-border FDI flows and shed light on the design of policies to reconcile the conflicting policies of austerity and growth that are required to prevent the sovereign debt racked euro-zone countries from imploding the single currency union based on the euro.

Capital Accumulation, Technological Progress and Environmental Change in a Three-Sector Growth Model

This paper builds a dynamic growth model with wealth accumulation, technological change, and environmental change on the basis of the neoclassical growth theory with an alternative approach to household behavior. The model synthesizes the economic growth mechanism in the neoclassical growth theory, Arrow’s learning-by-doing, and the environmental change in some traditional dynamic models of environmental economics. It describes a dynamic interdependence among wealth accumulation, technological change, and environmental change under perfect competition with environmental taxes. The author simulated the model to demonstrate existence of equilibrium points and motion of the dynamic system. In particular, the author demonstrated effects of changes in the government policy and preference upon both short-run and long-run economic behavior of the system.

Measuring Convergence Using Dynamic Equilibrium Models: Evidence from Chinese Provinces

We propose a model to study economic convergence in the tradition of neoclassical growth theory. We employ a novel stochastic set-up of the Solow (1956) model with shocks to both capital and labor. Our novel approach identifies the speed of convergence directly from estimating the parameters which determine equilibrium dynamics. The inference on the structural parameters is done using a maximum-likelihood approach. We estimate our model using growth and population data for China’s provinces from 1980 to 2009. We report heterogeneity in the speed of convergence both across provinces and time. The Eastern provinces show a higher tendency of convergence, while there is no evidence of convergence for the Central and Western provinces. We find empirical evidence that the speed of convergence decreases over time for most provinces.

Growth effects of regional policy in Germany: results from a spatially augmented multiplicative interaction model

Private investment subsidies are a key instrument for regional policy making to foster the economic development in lagging regions. In this paper, we analyze their effect on labor productivity growth for German labor market regions for the period from 1994 to 2006. A spatially augmented multiplicative interaction model based on neoclassical growth theory is used, which allows us to assess the marginal effect of regional policy proxied by overall payments of the main German regional development program on the region’s convergence speed conditional on its initial income position as well as policy-related spillovers from its spatial neighborhood. Our results show a statistically significant positive effect of regional policy on labor productivity growth, which increases, the further away the supported region is from its steady-state income level, and the more grants are provided to its geographical neighborhood. The latter effect highlights the existence of positive spatial spillover effects from regional policy in Germany, which enhance the attractiveness of the whole macro region for private sector investments. The additional growth stimulus provided by a 1 % increase in the region’s funding volume is thereby related to an up to 0.3 % gain in terms of labor productivity growth. For regions with the highest initial gaps to steady-state income in the sample distribution, the regional policy stimulus accounts for almost 8 % of the regions’ productivity growth performance.

Foreign trade, human capital and economic growth: An empirical approach for the European Union countries

While neoclassical growth theory does not consider external demand to be a constraint to growth, the Keynesian approach emphasizes that demand forces are actually the key factors determining growth. In this paper, an attempt is made to introduce the balance-of-payments constraint hypothesis into the neoclassical growth model through a consideration of a sample of 14 European Union (EU) countries over the period 1980–2004. A panel data model is estimated using different proxies for human capital and foreign trade as conditioning factors to explain growth. The income-elasticity ratio with respect to exports and imports and the degree of openness are also used to capture the effects of (non-price) competitiveness and trade intensification on growth. The regression analysis shows that the inclusion of human capital, external trade and interaction terms between them have significant effects on growth. Depending on the combination of variables used, the constraining factorto growth can be shown to be due to foreign trade, human capital or both.

Tourism and Economic Structure in a Small-Open Growth Model

The purpose of this study is to examine effects of tourism on economic development. We build an economic growth model of a small open country with tourism in a perfectly competitive economy. The economy consists of one service sector and one industrial sector. International tourists and domestic residents consume non-traded goods and services. The land is distributed between housing and supply of services. The production side is the same as in the neoclassical growth theory, while we use an alternative utility function to determine behavior of the household. The system has a unique stable equilibrium point. We simulate the motion of the national economy and examine effects of changes in the rate of interest, the price elasticity of tourism, the global economic condition, the total productivities of the industrial and service sectors, and the propensity to save. The comparative dynamic analysis provides some important insights. For instance, when the price elasticity of tourism is increased, the tourist demand and the price of services are reduced; national trade balance is deteriorated; the output of the service sector is reduced and the output of the industrial sector is increased; some of labor force is shifted from the service sector to the industrial sector; the lot size falls and the land input of the service sector is reduced; and the GDP, the consumption levels of the goods and services and wealth level rise initially but fall in the long term.

Electrifying solutions: Can power sector aid boost economic growth and development?

This study investigates the validity of assumptions used to justify large aid disbursements to power sector projects in developing countries. Using neoclassical growth theory and panel data analysis this study illustrates the basis for and limitations of the assumption of a causal electricity–economic growth relationship. The relationship between electricity consumption and economic growth is statistically tested on a sample of 77 countries over a 25year period from 1980 to 2005 using extensions of the Solow growth model and the model employed by Mankiw et al. (1992) to include electricity as an explicit factor of production. We also explore whether there is any concrete evidence supporting the claim that regions previously without electricity experience positive development outcomes in the shape of economic growth and poverty alleviation upon its introduction. The study focuses on Norway's experience with power sector aid, looking into the results and the data amassed from its half century involvement in clean energy electrification projects in developing countries. Our resulting analysis suggests that there are reasonable grounds to pursue electricity as a development enabler; however, there is insufficient information to justify increased power aid disbursements without a significant change in evaluation and scrutiny of existing and future electrification projects.

A stochastic dynamic model of trade and growth: Convergence and diversification

There is a growing literature that studies the properties of models that combine international trade and neoclassical growth theory, but mostly in a deterministic setting. In this paper we introduce uncertainty in a dynamic Heckscher–Ohlin model and characterize the equilibrium of a small open economy in such an environment. We show that, when trade is balanced period-by-period, the per capita output and consumption of a small open economy converge to an invariant distribution that is independent of the initial wealth. Further, at the invariant distribution, there are periods in which the small economy diversifies. Numerical simulations show that the speed of convergence increases with the size of the shocks. In the limit, when there is no uncertainty, there is no convergence and countries may specialize permanently. The paper highlights the role of market incompleteness, as a result of the period-by-period trade balance, in this setup. Through an analytical example we also illustrate the importance of country specific risk in delivering our results.

Economic growth with space and fiscal policies with housing and public goods

PurposeThis study aims to examine dynamic interactions among economic growth, geography and the housing market with public goods financed by the government. A general dynamic equilibrium model of an isolated economy with economic geography, local public goods and capital accumulation is to be constructed. The economy has three sectors, supplying industrial goods, housing, and local public goods. The model synthesizes the main ideas in neoclassical growth theory, the Alonso urban model, and the Muth housing model in an alternative framework to the traditional growth theory.Design/methodology/approachThe model is based on the neoclassical growth theory with an alternative approach to household behavior. The paper shows how to solve the dynamics of the economic system and simulate the model to demonstrate dynamic interactions among economic growth, housing market, residential distribution and public goods over time and space.FindingsThe paper simulates equilibrium and motion of the spatial economy with Cobb‐Douglas production and utility functions. The simulation demonstrates, for example, that, as the tax rate on the land income is increased, the total capital stocks and the stocks employed by the three sectors are increased, the rate of interest falls and the output of the industrial sector and the wage rate are increased, the land devoted to local public goods falls and the land rent and housing rent rise over space, the consumption level of the industrial goods and the total expenditures on the public goods are increased.Practical implicationsThe paper provides some possible implications of the model for complicated consequences of government policy over time and space. In particular, the paper shows that a change in government policy not only has a macroeconomic impact over time, but also affects the economic geography of the national economy.Originality/valueThe paper offers insights into the linkage among growth, national public policies and economic geography.

ICT adoption and development: issues in rural accommodation

Purpose – The work described in this paper is of direct relevance to those with an interest in the phenomena surrounding information and communication technologies adoption by the rural accommodation sector. The paper aims to provide the results from a preliminary study, which examined differences in the level of inter‐firm technology adoption between rural and urban accommodation establishments within a major tourism destination, Scotland.Design/methodology/approach – A survey was conducted, and the results set out here suggest that these differences are only presented with two types of technology, i.e. systems requiring networking infrastructure and sector‐specific applications.Findings – The discussion suggests that the neoclassical theory of growth and theory of development are contradictory but that they complementarily explain different levels of adoption between rural and urban setting.Research limitations/implications – Not only theoretical, but also industry implications and suggestions for furth...

Costly Financial Intermediation in Neoclassical Growth Theory

The neoclassical growth model is extended to include costly intermediated borrowing and lending between households. This is an important extension as substantial resources are used in intermediating the large amount of borrowing and lending between households. In 2007, in the United States, the amount intermediated was 1.7 times GNP, and the resources used in this intermediation amounted to at least 3.4 percent of GNP. The theory implies that financial intermediation services are an intermediate good and that the spread between borrowing and lending rates measures the efficiency of the financial sector.

Costly financial intermediation in neoclassical growth theory

The neoclassical growth model is extended to include costly intermediated bor- rowing and lending between households. This is an important extension as sub- stantial resources are used to intermediate the large amount of borrowing and lending between households. In 2007, in the United States, the amount interme- diated was 1.7 times gross national product (GNP), and the resources used in this intermediation amounted to at least 3.4 percent of GNP. The theory implies that financial intermediation services are an intermediate good, and that the spread between borrowing and lending rates measures the efficiency of the financial sec- tor. Keywords. Aggregate intermediation, borrowing, lending, equity premium, gov- ernment debt, life cycle savings, retirement. JEL classification. D31, E2, E21, E44, G1, G11, G12, G23, H0, H62.

Social Attributes And Economic Instability In Africa

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: Batang; font-size: x-small;">How do the social characteristics of African economies affect their relative economic stability? This paper offers a new nominal definition of economic instability in terms of average standard deviations from the exponential growth path suggested by neoclassical growth theory under ideal conditions. We used the portion of the population that subsists on agriculture as an indication of how diverse and adaptable any particular economy is. Literacy rates may serve as a proxy for the quality and adaptability of the labor force in the various countries. Other variables used are urban population as a percentage of total population, life expectancy, infant mortality rates and the corruption perception index. These variables were all statistically significant in explaining economic instability with the exception of corruption perception index and infant mortality rates that were statistically insignificant. </span></p>

Social Attributes And Economic Instability In Africa

How do the social characteristics of African economies affect their relative economic stability? This paper offers a new nominal definition of economic instability in terms of average standard deviations from the exponential growth path suggested by neoclassical growth theory under ideal conditions. We used the portion of the population that subsists on agriculture as an indication of how diverse and adaptable any particular economy is. Literacy rates may serve as a proxy for the quality and adaptability of the labor force in the various countries. Other variables used are urban population as a percentage of total population, life expectancy, infant mortality rates and the corruption perception index. These variables were all statistically significant in explaining economic instability with the expectation of corruption perception index and infant mortality rates which were statistically insignificant.

Environmental Policy and Pollution Dynamics in an Economic Growth Model

The purpose of this paper is to study dynamic interactions among capital accumulation, environmental change and labor distribution. We try to synthesize the growth mechanism in the neoclassical growth theory and the environmental dynamics in traditional models of environmental economics within a comprehensive framework with an alternative approach to household behavior. We build a model which describes a dynamic interdependence among physical accumulation, environmental change and division of labor under perfect competition with environmental taxes on production, wealth income, wage income and consumption. We simulate the model to demonstrate existence of equilibrium points and motion of the dynamic system. The simulation demonstrates some dynamics which can be predicted neither by the neoclassical growth theory Solow model nor by the traditional economic models of environmental change.