Simple Endogenous Growth Model Research Articles

A tale of two taxes: State‐dependency of tax policy

AbstractIn this paper, we build a simple endogenous growth model with labour and corporate taxes to investigate the asymmetric effects of tax policy over the growth trajectory. We employ a newly developed panel smooth transition model to empirically analyse a sample of 19 advanced economies over the 1961–2017 period. We find that both the asymmetric effects and the tax measures used are essential. We also find that the effects of corporate and personal taxes on long‐run growth are non‐linear, while the detrimental effects of personal taxes are empirically larger compared to those of corporate taxes once non‐linearities are controlled for.

Do Remittances Promote Labor Productivity in Mexico? A DOLS and FMOLS Analysis, 1970-2017

Abstract This paper investigates the impact of remittance flows on economic output and labor productivity for Mexico during the 1970-2017 period. The findings suggest that remittance flows to Mexico have a positive and significant effect on economic output and labor productivity. The paper is organized as follows: First, it gives an overview of remittance flows in absolute terms, relative to GDP, in comparison to FDI inflows, and in terms of their regional destination. Next, the paper reviews the growing literature that assesses the impact of remittances on investment spending and economic growth. Third, to motivate the discussion of the empirical results, the paper presents a simple endogenous growth model that explicitly incorporates the potential impact of remittance flows on economic output and labor productivity. Fourth, it presents a modified empirical counterpart to the simple model that tests for unit roots and performs both a Johansen cointegration test and a Gregory and Hansen cointegration test with an endogenously determined regime shift. FMOLS and DOLS long-run estimates for the period in question suggest that remittance flows to Mexico have a positive and significant effect, albeit small, on both the levels of economic output and labor productivity. The concluding section summarizes the major results and discusses potential avenues for future research on this important topic. JEL Classification numbers: C10, F01, 010, 054. Keywords: ADF unit root test, DOLS, FDI inflows, FMOLS, Gregory-Hansen cointegration single-break test, Gross fixed capital formation, Johansen Cointegration test, KPSS no unit root test, labor productivity, and remittance flows.

TESTING THE LONG-RUN GROWTH EFFECTS OF FOREIGN DIRECT INVESTMENT IN TÜRKIYE: EVIDENCE FROM ARDL & NARDL ANALYSIS

This study examines the linear and nonlinear effects of foreign direct investment on the long-run economic growth in Türkiye for the period of 1970-2020, within the framework of a simple endogenous growth model represented by a production function in the form of Cobb-Douglas, where the assumptions of constant returns to scale and decreasing productivity are valid for all collectible capital inputs. For this purpose, the study investigates whether the changes in fixed capital and foreign direct investment rates affect the GDP per capita growth rate linearly and non-linearly by using the ARDL & NARDL approach. The findings show that there is a linear and a nonlinear cointegration relationship between the foreign direct investment rate and GDP per capita growth rate, but the foreign direct investment rate does not make significant contributions to the growth rate in the long run. According to another finding, positive and negative shocks in the foreign direct investment rate, depending on the contraction and expansion periods of the Turkish economy, do not significantly and asymmetrically affect the growth rate in the long run.

The capital tax paradox in a greening economy

We adopt a simple model of endogenous growth with polluting capital and a fixed budget for aggregate emissions. Pollution abatement efficiency is growing over time due to technical progress. We find that long-run capital and consumption are inversely related to the initial capital stock. Capital taxation does not harm the economy but actually raises long-run consumption and production, which we call the “capital tax paradox.” The reason for this surprising result is that in an economy with a binding carbon policy, early abundance of polluting capital is not a blessing but a curse. It is preferable to have a large capital stock when abatement efficiency has grown sufficiently large. The paper also provides novel results on the impact of pollution intensity and the rate of technical progress on the greening of the economy and the pollution permit prices. In the quantitative part, we calibrate model and study economic growth under different assumptions on the basic model parameters.

The Impact of Tax Revenue on Economic Growth in Somalia

The study used a simple endogenous growth model to analyze the impact of tax revenue on economic growth in Somalia. The study used a classical linear regression model based on the OLS estimation method to establish the nature and strength of relationship between taxation and economic growth. Pre-estimation tests were carried out to determine heteroskasdicity, correlation, multicollinearity and normality of the variables. The results revealed overall significance of the explanatory variables in explaining GDP. In view of these findings, the coefficient of determination showed that 49.3 percent of the variation in GDP is explained by income and corporate taxes, international trade taxes and domestic indirect taxes. The findings further revealed that the coefficient of domestic indirect taxes was negative and influencing the economic growth in Somalia. The implications of this is that policy makers should focus more on income and corporate taxes and international trade taxes so as to generate more revenue by improving the tax collection system, eliminating fraud, evasion and corruption Keywords: Tax revenue, GDP, evasion and corruption DOI: 10.7176/JESD/13-2-07 Publication date: January 31 st 2022

An Inverted U-Shaped Relationship between Public Debt and Economic Growth under the Golden Rule of Public Finance

Empirical evidence shows an inverted U-shaped relationship between public debt-to-GDP ratio and economic growth for many advanced economies. Using a simple endogenous growth model with public debt under the Golden Rule of Public Finance (GRPF), which allows the government to issue bonds only to finance public investment, this paper explains the relationship. Although Greiner [1] explains it in the similar model, he introduces a more restrictive assumption than GRPF that the amount of public investment must be always equal to that of newly issued bonds, i.e., public investment must be financed only by newly issued bonds. This paper shows that the assumption is not needed. In other words, the inverted U-shaped relationship emerges in a more realistic case when public investment is partly financed by other sources than government bonds such as taxes.

Environmental Policy Instruments and the Long-Run Management of a Growing Stock of Pollutant

Most environmental damage can be reduced through investments in the management of the pollutants that cause this damage. In the case of climate change, for instance, the harmful effects of the accumulated stock of greenhouse gases depend on the adaptation effort. Our aim is to analyze which economic policy schemes can restore the social optimum in such contexts. We consider a simple endogenous growth model with a polluting non-renewable resource and directed technical change, in which the environmental damage (and unique externality) depends on the accumulated stock of pollutant as well as on a stock of green knowledge dedicated to its management. Here, the socially optimal policy consists in a tax on the environmental damage, which provides the right incentives to (a) invest in green knowledge and (b) mitigate pollutant flows. More usual—and more easily implementable—environmental policies like taxes on pollution flows (e.g., carbon tax) cannot yield first-best outcomes in this context since they do not provide the right incentives to invest in the management of the emitted pollutants. We nevertheless show how coupling such a type of policy tool with a subsidy to green R&D can restore the social optimum.

ASSET BUBBLES AND ECONOMIC GROWTH UNDER ENDOGENOUS MARKET STRUCTURE

By considering a simple endogenous growth model, we propose a new theoretical channel through which the presence of asset bubbles can promote economic growth. In the model economy, long-lived value-maximizing firms continuously improve the quality of their specific products through in-house research and development (R&D), while simultaneously new firms enter into the market. The key feature is endogenous market structure: The number of firms is endogenously determined, which leads to variation in firm size measured in terms of the scale of production at the level of an individual firm. The presence of asset bubbles unambiguously gives rise to larger firms. This allows in-house R&D expenditure to be spread over the greater numbers of goods that the firms produce, which can increase incentives to undertake in-house R&D.

Explaining the nonlinearity of inflation and economic growth: The role of tax evasion

This paper incorporates tax evasion into a simple endogenous growth model with money in the utility function. Government in the economy finances its constant fraction of unproductive expenditures through taxing output, penalty revenues, and seigniorage. By endogenizing the individual decision of tax evasion, we show that the ratio of government tax revenues over output is not monotonously related to the tax rate, whereas economic growth is always decreasing in the tax rate. We then consider a scenario that the government first selects a growth rate of nominal money and then the tax rate is endogenously determined by the government budget constraint. Given this, our model finds a threshold level of inflation in which the inflation-growth nexus may be positive or negative for initial inflation below it, but is definitely negative for initial inflation over it. We also find that the negative relationship for initial inflation over this threshold level is convex. These conclusions are consistent with recent empirical studies.

A simple endogenous growth model with endogenous fertility and environmental concern

AbstractWe analyze the implications of endogenous fertility choices on both economic and environmental performances in a stylized AK‐type growth model. Differently from what traditionally assumed in the growth and environment literature, we allow pollution to be not only a by‐product of productive activities by firms but also a result of households’ behavior, as suggested by the celebrated IPAT equation. We show that along the balanced growth path equilibrium, economic growth may be non‐monotonically related to the population growth rate as agents care for the environment; moreover, demographic policies can be used both to achieve win‐win outcomes (simultaneously fostering economic growth and improving environmental quality) and to stabilize the otherwise non‐monotonic economic and population growth relationship.

Optimal tax structure and public expenditure composition in a simple model of endogenous growth

In this paper, using an endogenous growth model where the structural relationship between public expenditures and taxes is considered, we investigate how the optimal tax structure is determined by public spending structure. Public spending provides two public goods, public service and public capital that impact production, the former as a flow, the latter as a stock, and these can be financed by flat rate taxes on consumption and income. Our theoretical model suggests that the optimal tax structure is equivalent to the public spending composition. Our numerical example provides a further proof for the theoretical propositions.

THE SIMPLE DYNAMICS OF PUBLIC DEBT WITH PRODUCTIVE PUBLIC GOODS

This paper analyzes the dynamics of public debt in a simple two-period overlapping-generations model of endogenous growth with productive public goods. Alternative fiscal rules are defined, with particular attention devoted to the golden rule. Conditions under which multiple equilibria may emerge are characterized. The analysis is then extended to consider the case of partial depreciation, an endogenous risk premium, an endogenous primary surplus rule, a generalized golden rule, a nonseparable utility function, and network externalities. If network effects are sufficiently strong, an increase in public investment may shift the economy from a low-growth equilibrium to a steady state characterized by both higher public debt ratios and higher output growth. This shift may enhance welfare as well. These results illustrate the importance of preserving, even in a context of fiscal retrenchment, the allocation of resources to specific types of public investment.

Is Environmental Protection Beneficial for the Environment?

AbstractWe analyze a simple endogenous growth model with environmental interactions. Economic production generates emissions of pollutants whose environmental impact is mitigated by abatement activities financed by government expenditure; environmental quality affects preferences but does not play any productive role. We show that government intervention, by reallocating resources from capital accumulation to environmental preservation activities, allows the economy to achieve a sustainable balanced growth path. Along such a path, softer environmental policy regimes lead to win–win outcomes, fostering economic growth and improving environmental quality. Such a result needs to be interpreted as a long run outcome, but it clearly shows that the compatibility between economic growth and environmental improvement is far from automatic. Indeed, in the long run it could paradoxically be the case that both the economy and the environment benefit from low levels of environmental protection.

Public Debt Adjustment in a Simple Model of Stochastic Endogenous Growth

Dans cet article, nous proposons un modèle prototype de croissance endogène stochastique pour étudier les canaux de transmission à travers lesquels la dette publique peut affecter le sentier de croissance potentielle et détériorer la productivité globale des facteurs. Dans un contexte de croissance endogène, les chocs transitoires et la manière dont l’économie s’y adapte, exercent un effet permanent (hysteresis). Nous envisageons ici deux stratégies d’ajustement des finances publiques en réponse à une augmentation de la dette publique causée par un choc technologique néfaste : une stratégie gradualiste ou une thérapie de choc. Notre modèle fait apparaître un arbitrage intertemporel entre ces deux stratégies, la première étant plus favorable à court terme, et la seconde à long terme. De surcroît, l’effet des chocs technologiques est fortement amplifié par le mode d’ajustement de la dette publique, mécanisme que nous qualifions « d’accélérateur de dette publique ».

A simple model of endogenous growth with financial frictions and firm heterogeneity

This paper constructs a simple model of endogenous growth with financial frictions and firm heterogeneity. In the presence of financial constraints and heterogeneity in production efficiency of firms, the firms whose efficiency exceeds the cutoff level produce and the entrepreneurs who own those firms become borrowers. We show that even if production technology of each firm has an Ak property, the aggregate economy has transition dynamics and that the balanced growth rate depends on the aggregate distribution of wealth between rentiers and entrepreneurs.

Innovation, product cycle, and asset prices

This paper constructs a simple endogenous growth model featuring the product cycle, i.e., the transition from monopoly to perfect competition, and studies its implications for both asset market and business cycle statistics. I find that the product cycle is a powerful amplification mechanism; the model incorporating the product cycle is able to generate nearly twice as large an equity premium as the model without the product cycle and, as a result, matches the equity premium data. The current paper thereby contributes to advancing a promising theory on the economic sources of long-run risks, postulating that innovation and R&D cause long-run uncertainties in economic growth.

Human population and atmospheric carbon dioxide growth dynamics: Diagnostics for the future

We analyze the growth rates of human population and of atmospheric carbon dioxide by comparing the relative merits of two benchmark models, the exponential law and the finite-time-singular (FTS) power law. The later results from positive feedbacks, either direct or mediated by other dynamical variables, as shown in our presentation of a simple endogenous macroeconomic dynamical growth model describing the growth dynamics of coupled processes involving human population (labor in economic terms), capital and technology (proxies by CO2 emissions). Human population in the context of our energy intensive economies constitutes arguably the most important underlying driving variable of the content of carbon dioxide in the atmosphere. Using some of the best databases available, we perform empirical analyses confirming that the human population on Earth has been growing super-exponentially until the mid-1960s, followed by a decelerated sub-exponential growth, with a tendency to plateau at just an exponential growth in the last decade with an average growth rate of 1.0% per year. In contrast, we find that the content of carbon dioxide in the atmosphere has continued to accelerate super-exponentially until 1990, with a transition to a progressive deceleration since then, with an average growth rate of approximately 2% per year in the last decade. To go back to CO2 atmosphere contents equal to or smaller than the level of 1990 as has been the broadly advertised goals of international treaties since 1990 requires herculean changes: from a dynamical point of view, the approximately exponential growth must not only turn to negative acceleration but also negative velocity to reverse the trend.

The Effect of the Financial Crisis on TFP Growth: A General Equilibrium Approach

In this paper, we use a simple endogenous growth model to show how a financial crisis might have a permanent effect on the level of total factor productivity (TFP). In the model, a financial shock leads to a rise in the spread between the rate of interest paid by firms and the risk-free rate. Since firms have to borrow to finance their research and development (R&D) spending, such a rise in the spread leads to a fall in R&D spending, which affects innovation and, hence, reduces TFP growth. In turn, this leads to permanent falls in the levels of output and labour productivity.

Remittances and Economic Growth in Mexico: An Empirical Study with Structural Breaks, 1970-2010

This paper investigates remittance flows to Mexico during the 1980-2010 period in absolute terms, relative to GDP, in comparison to FDI inflows, and in terms of their regional destination. Next, the paper reviews the growing literature that assesses the impact of remittances on investment spending and economic growth. Third, it presents a simple endogenous growth model that explicitly incorporates the potential impact of remittance flows on economic and labor productivity growth. Fourth, it presents a modified empirical counterpart to the simple model that tests for both single- and two-break unit root tests, as well as performs cointegration tests with an endogenously determined level shift over the 1970-2010 period. The error-correction model estimates suggest that remittance flows to Mexico have a positive and significant effect, albeit small, on both economic growth and labor productivity growth. The concluding section summarizes the major results and discusses potential avenues for future research on this important topic.

Innovation, Product Cycle, and Asset Prices

This paper constructs a simple endogenous growth model featuring the product cycle, i.e., the transition from monopoly to perfect competition, and studies its implications for both asset market and business cycle statistics. I find that the product cycle is a powerful amplification mechanism; the model incorporating the product cycle is able to generate nearly twice as large an equity premium as the model without the product cycle and, as a result, matches the equity premium data. The current paper thereby contributes to advancing a promising theory on the economic sources of long-run risks, postulating that innovation and R&D cause long-run uncertainties in economic growth.