Two-sector Endogenous Growth Model Research Articles

Endogenous growth model with Bayesian learning and technology selection

We introduce Bayesian learning and technology selection into a two-sector endogenous growth model with physical and human capital and study their impact on steady state welfare and stability properties. We show that there are two balanced growth paths that are locally determinate: one corresponding to the good new technology selection, the other sticking to the old technology selection. The equilibrium selection is driven by Bayesian learning and the true quality of the new technology could remain unlearned with a positive probability. We establish that, at steady state, the rate of achieving a high Total Factor Productivity (TFP) in the good new technology has a positive impact on the growth rate of the economy, the GDP and the physical to human capital ratio.

Optimal transition to greener production in a pro-environmental society

Achieving sustainable development requires a transition from the current production fashion that leads to the environmental degradation to a cleaner production. Such a substitution can be costly if the new technology is less productive. In this paper, we present a two-sector endogenous growth model that analyzes the potential of a transition from a more productive brown sector to a less productive green sector. The representative agent maximizes the weighted sum of the present value of the utility of consumption and the amenity value of green production. We derive a closed-form optimal solution using a suitable version of the Pontryagin Maximum Principle. For an economy, in which the brown sector dominates initially, we obtain that as long as the preference towards green production is positive, the optimal solution always has a single switching point and the following structure. Initially, the representative agent distributes the output between investment in the green sector and consumption, making no investment in the brown sector. This allows attaining a particular critical ratio between green and brown capital stocks in the fastest way. Once this ratio has been reached, the optimal solution switches to that, which allows both capitals to grow at the same rate. The representative agent has to sacrifice his/her consumption to invest in the green sector, especially in the initial period, which is due to the amenity that this sector provides. Under constant productivities, a full substitution of brown production by green production is not possible; rather, they co-exist and evolve proportionally. Three parameters are positively related to the ratio of the green capital stock: the social discount rate, the (augmented) productivity of the green capital, and a representative agent’s preference towards the green production amenity.

Closing the loop in a circular economy: Saving resources or suffocating innovations?

Policymakers around the world are increasingly embracing the idea of a “circular economy” (CE), an economy built on the principle of reuse of materials and produced goods through recycling, refurbishing, and extended product life. By using less new materials per unit of value added, a CE is considered good for both the environment and the economy. Yet closing the material loop also changes the structure of the economy and the incentives for labor- and resource-productivity enhancing innovations. The overall economic impact is thus not so clear. This paper develops a two-sector endogenous growth model with Schumpeterian innovation, in which the primary sector continuously develops new products and uses primary resources in production, while the secondary sector refurbishes retired products for reuse. We show that increased refurbishing increases short-run consumption, but reduces resource prices (relative to wages) and crowds out the incentives for developing new, possibly less resource-intensive products. If innovations are strongly resource-saving, raising the refurbishing rate leads to a net economic loss.

On the indeterminacy of equilibrium in an endogenous growth model with non-separable preferences

This paper studies equilibrium indeterminacy in an extended version of the two-sector endogenous growth model by Mino (1999) by allowing alternative specifications for leisure. When utility depends on pure leisure, indeterminacy may only emerge if consumption and leisure are Edgeworth complements. We obtain the necessary and sufficient conditions for indeterminacy from the arbitrage condition on the two assets of the economy: consumption and human capital. When qualified leisure is considered, indeterminacy does not arise.

Why Does Oil Matter?: Commuting and Aggregate Fluctuations

Oil price shocks are known to have a sizable macroeconomic impact, despite a relatively small fraction of total expenditures that is devoted to energy. Using micro data we document a significant effect of oil prices on labor supply and commuting distance, especially among low-skilled workers who face large commuting costs, relative to their wages. In addition, equity returns of firms in less skill-intensive industries are more sensitive to oil price fluctuations. Motivated by this empirical evidence, we employ a two-sector endogenous growth model with an oil-dependent commuting friction to examine the effect of oil shocks on employment, real wages, and growth, as well as equity prices. Negative oil supply shocks followed by oil price increases depress labor supply, especially in the less capital-intensive low-skill sector, where employment is most sensitive to the cost of commuting. As a result, output growth slows down in the medium run as innovation and capital are reallocated towards the less affected high-skill sector, resulting in subsequent rise in the skill premium.

Financial deepening in a two-sector endogenous growth model with productivity heterogeneity

Abstract This paper studies the effects of financial deepening and fiscal policy on human capital formation, working hours and growth in a model with financial frictions and productivity heterogeneity. The paper first shows that in the range of capital tax rates that attains a balanced growth path, taxation exerts inverted U-shaped effects on growth. The paper then analytically derives and shows that the growth maximizing tax rate and the corresponding growth are increasing concave functions of the financial deepening level. Finally, it is shown that theoretical predictions of the model are in line with data from OECD countries.

Monetary rules in a two-sector endogenous growth model

We study the balanced growth paths and their stability features of a monetary two-sector endogenous growth model with physical capital and human capital accumulation. The demand of money is motivated on the ground of a fractional cash-in-advance constraint on consumption expenditures and on those in the investment in physical capital. We consider, in sequence, two monetary rules implemented by the Central Bank. First, we assume that the latter pegs the money growth rate and then the nominal interest rate according to a Taylor feedback rule. When the Central Bank pegs the money growth rate, there emerges a unique balanced growth path which turns out to be indeterminate for a low amplitude of the liquidity constraint and/or for a low enough intertemporal elasticity of substitution in consumption even under the hypothesis that the cash-in-advance constraint applies uniquely on consumption expenditures. On the other hand, when the monetary policy is implemented according to a Taylor feedback rule, an unintended liquidity trap equilibrium may coexist with multiple interior Taylor equilibria. If, on the one hand, the liquidity trap equilibrium is bound to be locally determinate; on the other hand, the Taylor interior equilibrium may become locally indeterminate provided the cash-in-advance constraint applies also on the investment in physical capital good and under a physical capital intensive human capital good. A global analysis is performed in which we show that the Taylor equilibrium and the liquidity trap one are connected through a heteroclinic orbit.

Estimated Human Capital Externalities in an Endogenous Growth Framework

To better understand the quantitative implications of human capital externalities at the aggregate level, we estimate a two-sector endogenous growth model with knowledge spill-overs. To achieve this, we account for trend growth in a model consistent fashion and employ a Markov-chain Monte-Carlo (MCMC) algorithm to estimate the model's posterior parameter distributions. Using U.S. quarterly data from 1964-2017, we find significant positive externalities to aggregate human capital. Our analysis further shows that eliminating this market failure leads to sizeable increases in education-time, endogenous growth and aggregate welfare.

Resource scarcity, technological progress, and stochastic growth

Will shortages of natural resources constrain economic growth? The answer seems yes, as the amount of natural resources on earth is finite. There can, however, be two excuses for this. First, the resource-saving technological progress might undo resource scarcity. Second, at the country level, countries can import resources from other countries. This paper revisits these two excuses. For technology, not all technological progress is resource-saving, and its arrival is unpredictable. For the import argument, at the global level, the world cannot make up for a shortage of natural resources by importing. Moreover, the amount of resources is difficult to forecast. To address these, I construct the open, stochastic two-sector endogenous growth model with exhaustible resources. I then analytically show that the answer is sensitive to the interaction between technology and resource shocks. In some cases, I find that higher resource uncertainty accelerates the expected growth and improves the welfare of agents.

Servicization with skill premium in the digital economy

PurposeThe purpose of this paper is to examine an endogenous growth model, as a component of a broader study of servicization with skill premium and its policy implications in the evolving digital economy.Design/methodology/approachThis paper develops a two-sector endogenous growth model which allows for the observed characteristics of digitally empowered structural changes. Specifically, the driving force of economic growth is the expanding variety of intermediate services as a consequence of innovation in services. The introduction of new intermediate services specifically contributes to total factor productivity in the production of service sector, and thus an uneven growth path with skill premium toward a service economy generally exists.FindingsThe principal finding of this paper is that the digitally empowered expanding variety of intermediate services due to innovation contributes significantly to total factor productivity in the production of service sector, and thus a servicization with skill premium generally exists along a steady-state path. In addition, this paper derives an optimal innovation policy to rule out the market failures due to innovation externality and market power in monopolistic competition conditions, and shows the Rybczynski effects of exogenous endowment changes in the evolving digital economy.Originality/valueThe principal contribution of this paper is to determine how unbalanced endogenous growth along a steady-state path is linked with a service economy with skill premium in the evolving digital economy. In addition to this analysis, this paper provides policy implications – namely, that a positive but finite innovation subsidy can achieve the social optimum in the digital economy, and that an exogenous increase in high-skilled labor can speed up a digitally empowered economic growth.

Financial Deepening in a Two-Sector Endogenous Growth Model with Productivity Heterogeneity

This paper studies the effects of financial deepening and public spending on human capital formation, working hours and growth in a model with financial frictions and productivity heterogeneity. The paper first shows that in the range of capital tax rates that attains a balanced growth path, taxation exerts inverted U-shaped effects on growth. The paper then analytically derives and shows that the growth maximizing tax rate and the corresponding growth are increasing concave functions of the financial deepening level. Finally, it is shown that theoretical predictions of the model are in line with data from OECD countries.

Sustainable endogenous growth model of multiple regions: Reconciling OR and economic perspectives

By combining the two-sector endogenous growth model and the dynamic game of remediation (utilization) activities, we propose a theoretical framework to investigate conflict in the sustainable growth path of multiple regions. We analyze the effects of two types of activities that differ in externalities on other regions’ stock of natural resources. In the case of inclusive remediation with a positive externality, the region that moves firstly will pass all the remediation responsibility to the other region and enjoy faster growth. However, in the case of exclusive utilization with a negative externality, both regions will experience the same growth rate, because each region could adopt exclusive utilization and reduce the stock of common resources available to the other region in the next period, which result in a symmetric equilibrium. We also find that regions have a stronger incentive to implement exclusive utilization than inclusive remediation. Although exclusive utilization seems fair to regions, it may deteriorate the social welfare, because regions may fall into a ‘prisoner's dilemma’ by using exclusive utilization. Three extensions of the model (i.e., increasing number of regions, asymmetric regions, and knowledge as a public capital good) are provided.

Endogenous structural change, aggregate balanced growth, and optimality

Developed countries have experienced labor employment shifts from the manufacturing sector to the services sector, which is a process termed structural change. We construct a two-sector endogenous growth model of structural change in which knowledge spillover sustains growth. Our model is consistent with the empirically observed pattern of structural change as well as aggregate balanced growth. In both centralized and decentralized economies, labor employment shifts from a high productivity growth sector to a low productivity growth sector. Because of knowledge spillover, excessive labor is allocated to productivity improvements in the high productivity growth sector. Hence, the decentralized economy is characterized by rapid structural change compared to the optimal allocation.

Sustainable water resource and endogenous economic growth

Poyang Lake suffers from a severe shortage of water, due to the construction of the Three Gorges Dam and other hydropower stations along the upper Yangtze River. In this paper, we propose a two-sector endogenous growth model to investigate the effects of extractive water use and impoundment activities on the optimal sustainable growth path. To offset the negative impact of the extractive use on the regenerative capacities of water resources, the impoundment activities should grow at a constant rate. We also provide a numerical example to illustrate the mechanisms of the endowment and the regenerative capacities of water resources on the long-run economic growth path. We find out some theoretical evidence to support the construction of a water conservancy project to restore regeneration capacities of Poyang Lake.

On a two-sector endogenous growth model with quasi-geometric discounting

We study a two-sector endogenous growth model with quasi-geometric discounting in which human capital is the engine of growth. We show that a planning economy welfare-dominates a competitive economy and time-consistent government policy is welfare-improving if the agents are sufficiently patient. The government policy consists of a tax on physical capital income and a subsidy on human capital accumulation. Our results differ from those of existing one-sector models with quasi-geometric discounting in which a competitive economy always outperforms a planning economy and the government’s time-consistent tax policies reduce equilibrium welfare.

A Closed-form Solution of a Two-sector Endogenous Growth Model with Habit Formation

This paper determines a closed-form solution of the two-sector endogenous growth model with habit formation. Differently to the paper of Hiraguchi, but similar to other approaches as those of Gomez, Turnovsky and Monteiro, we consider that the habits are formed in an external manner and enter additively into the utility function.

Fiscal position and the financing of productive government expenditures: an application to Latin America

Government spending on public infrastructure, education, and health care can increase economic growth. However, the appropriate financing depends on a country’s fiscal position. We develop a two-sector endogenous growth model to explore how variations in the composition and financing of government expenditures affect economic growth. We find that, when tax rates are moderate, funding public investment by raising taxes may increase long-run growth. If existing tax rates are high, public investment is only growth enhancing if funded by restructuring the composition of overall public spending. Additionally, public investment that is debt financed can have adverse effects on long-run growth due to the resulting increases in interest rates and debt-servicing costs.

Optimal fiscal policies in an economy with externalities from public spending

This paper examines the optimal fiscal policies in an economy with externalities from government expenditure. We extend Lucas (Oxf Econ Pap 42:293–316, 1990) two-sector endogenous growth model and consider the spillover effects from the public spending on infrastructure and education. We compare the optimal fiscal policies derived from the Ramsey allocation problem with those in the centrally-planned economy. The results of this paper are as follows. First, the optimal share of public spending on infrastructure is smaller than its relative contribution in the production function. Next, the optimal share of public spending on education is smaller than its relative contribution in the accumulation of human capital, and does not affect the tax rate of capital income. Finally, the optimal tax rate of capital income is positive if the externality from public productive spending exists.

Growth and welfare effects of environmental tax reform and public spending policy

This paper considers the implications of environmental tax reform and public spending policy for growth and welfare. Using a two-sector endogenous growth model where the interactions between health, education, and the environment are taken into account, we show that revenue-positive tax reforms combined with a change in the public spending structure may improve long-run growth and welfare. However, this outcome incurs relatively high welfare cost during the transition phase. This is particularly the case when the spending policy favors education spending.

Energy prices and economic growth in the long run: Theory and evidence

Abstract In this paper, we attempt to derive and test the role of energy prices on economic growth. We first developed a two-sector endogenous growth model, based on J Polit Economy 1991; 99:500–521. We modified the model such that consumption goods sector uses energy as an input along with capital. The model allows us to show that the growth rate of energy price has a negative effect on the growth rates of energy use and real GDP. Following this, derived theoretical relationships between energy prices and economic growth and energy consumption were tested empirically using error-correction based panel cointegration tests and panel Autoregressive Distributed Lag (ARDL) approach. We applied this methodology on data of composite energy prices, GDP per capita and energy consumption per capita for sixteen countries for the period between 1978 and 2011. We found significant cointegration between energy prices and real GDP per capita, as well as between energy prices and energy consumption per capita. Moreover, long-run estimates reveal negative and significant effects of composite energy prices on both GDP per capita and energy consumption per capita. We suggest that increasing the share of renewable energy sources in energy consumption would help policy-makers to control permanent long-term increases in consumer energy prices, in turn leading to an increase in economic growth, and hence in welfare. This paper contributes to the literature by highlighting the existence of a previously neglected welfare-improving channel of renewable energy.