Phases of economic development and the transitional dynamics of an innovation-education growth model

This paper extends earlier analysis of the transitional dynamics of a growth model in which both human capital and innovation drive income expansion. Funke and Strulik [2000. On endogenous growth with physical capital, human capital and product variety. European Economic Review 44, 491-515] suggest that the typical advanced economy follows three development phases, characterized in a temporal order by physical capital accumulation, human capital formation, and innovation, and that the transitional dynamics of the model reproduce such a sequencing. I argue that other sequences of the phases of development are possible and show that the model can generate a trajectory in which innovation precedes human capital formation. This trajectory accords with the observation that the rise in formal education followed with a considerable lag the process of industrialization. U.S. income and educational time series data are used to corroborate the innovation-education trajectory.     

FISCAL POLICY IN AN ENDOGENOUS GROWTH MODEL WITH PUBLIC CAPITAL AND POLLUTION

This paper studies the growth and welfare effects of fiscal policy in an endogenous growth model with public capital and environmental pollution. I assume that pollution is due to aggregate production, and that it does not have a direct effect on production but only reduces household utility. I study the growth effects of fiscal policy for the model on the balanced growth path, taking transition dynamics into account. I then analyse the welfare effects of fiscal policy along the balanced growth path. Finally, I show how the fiscal parameters must be set so that the competitive economy replicates the social optimum.     

Growth and welfare effects of stabilizing innovation cycles

We consider a simple model of innovation where equilibrium cycles may arise and show that, whenever actual capital accumulation falls below its balanced growth path, subsidizing innovators by taxing consumers has stabilizing effects, promotes sustained growth and increases welfare. Further, if the steady state is unstable under laissez faire, the introduction of the subsidy can make the steady state stable. Such a policy has beneficial effects as it fosters output growth along the transitional adjustment path, and increases the welfare of current and future generations.     

HUMAN CAPITAL ACCUMULATION,HOME PRODUCTION AND EQUILIBRIUM DYNAMICS*

In this paper, we construct a three‐sector endogenous growth model in which long‐run growth is propelled by human capital accumulation. We show that although the addition of a home sector to the standard two‐sector endogenous growth model preserves the well‐behaved balanced growth equilibrium properties, it generates new transitional dynamics around the balanced growth path. It is shown that, when there is a positive shock to physical capital, our model is more likely to exhibit paradoxical growth than are standard multisector endogenous growth models that exclude home production. Our analysis adds new results to those from the related literature on leisure.     

The Return to Capital and Convergence in a Two Sector Model of Endogenous Growth

This paper obtains a simple algebraic derivation of the transitional dynamics of a two-sector endogenous growth model. This paper finds that the return to capital and the growth rate of output fall over time on the transition path if the initial ratio of physical capital to human capital is lower than the steady state level. It also shows that two sector endogenous growth models are consistent with the evidence on conditional convergence found by Barro (1991) and Mankiw, Romer, and Weil (1991). Neoclassical growth models and endogenous growth models are impossible to distinguish in terms of the falling rate of return on capital or in terms of conditional convergence. [O41]     

Variety of products,public capital,and endogenous growth

This paper develops an extension of the endogenous growth model with variety expansion presented in Romer [Romer, P.M., 1990. Endogenous technical change, Journal of Political Economy 98, part 2, S71–S102] by considering public capital accumulation. Characterizing the transitional dynamics, the growth rate of consumption traces (and available number of intermediate goods also might trace) an S-shaped converging path to the equilibrium growth rate, similar to a logistic growth curve, if the intensity of public capital is sufficiently high. We also show that public investment enhances economic growth because it stimulates demand for intermediate goods and raises the market interest rate.     

Vintage capital and the dynamics of the AK model

This paper analyzes the equilibrium dynamics of an AK-type endogenous growth model with vintage capital. The inclusion of vintage capital leads to oscillatory dynamics governed by replacement echoes, which additionally influence the intercept of the balanced growth path. These features, which are in sharp contrast to those from the standard AK model, can contribute to explaining the short-run deviations observed between investment and growth rates time series. To characterize the optimal solutions of the model we develop analytical and numerical methods that should be of interest for the general resolution of endogenous growth models with vintage capital.     

Capital accumulation,income distribution and endogenous fertility in an overlapping generations general equilibrium model

A study is conducted in attempts to increase the understanding of the links between macroeconomic effects and causes of population growth in formulating policy. An overlapping generations general equilibrium model is employed aggregating household decisions about fertility, savings, and investment in the human capital of children with the objective of studying intertemporal relationships among population growth, income distribution, inter-generation social mobility, skill composition of the labor force, and household income. As a result of endogenous fertility, the equilibrium path attains steady state from the second generation. Income tax transfer, child taxation, and social security taxation policies are also examined in the paper. A structural explanation is given for the inverse household income-child quantity and negative child quality-quantity relationships seen in developing countries. In a Cobb-Douglas economy, these relationships hold in the short-run, potentially working over the long-run in other economies. Overall, the model shows that group interests may hinder emergence of perfect capital markets with private initiatives. Where developing countries are concerned, these results have strong implications for population policy. A policy mix of building good quality schools, or subsidizing rural education, introducing a formal social security program, and providing high-yield, risk-free investments, banking, and insurance services to the poor is recommended.     

A dynamic analysis of an endogenous growth model with leisure

Summary. The main goal in this paper is to analyze an economic model of endogenous growth where human capital accumulation acts as the engine propelling economic activity. The added ingredient in our model is that agents derive utility from consumption and leisure, where leisure is defined as the amount of time devoted to those activities augmented by the level of education. Under regular conditions we show that there is a unique globally stable balanced growth path. We also provide a characterization of the behavior of our economic variables along the transition. Received: May 26, 1998; revised version: September 9, 1999     

Ramsey fiscal policy and endogenous growth

This paper examines the effects of fiscal policies on capital accumulation and economic performance in a simple endogenous growth model with elastic labor supply by focusing on the implementability of a competitive equilibrium with productive public spending and distortionary taxation. Given a feasible exogenous fiscal policy, productive public spending can, at first, lead to positive short-run and long-run growth in the unique competitive equilibrium. However, although strictly positive growth is possible in the short run, a Ramsey policy with productive public spending does not implement positive capital accumulation in the long run. Also, the local indeterminacy of Ramsey allocations, in conjunction with the global multiplicity, arises as an implementable competitive equilibrium with Ramsey policies: namely, a continuum of transitional dynamics and multiple balanced growth paths. I am grateful to Kazuo Nishimura, Theodore Palivos, Sang Hee Won, John Conlon, Apostolis Philippopoulos, Arved Ashby, In Ho Lee, Katsuaki Terasawa, and an anonymous referee of this journal for valuable comments and suggestions. I also thank seminar participants at Ioannina University, Kyoto University, University of Mississippi, and Seoul National University. This paper is supported by 2006 Sabbatical Project, Kyung Hee University.     

Financial development and economic growth: long‐run equilibrium and transitional dynamics

We analyze the impact of financial development on economic growth. Differently from previous studies that focus mainly on balanced growth path outcomes, we also analyze the transitional dynamics of our model economy by using a finance‐extended Uzawa–Lucas framework where financial intermediation affects both human and physical capital accumulation. We show that, under certain rather general conditions, economic growth may turn out to be non‐monotonically related to financial development (as suggested by the most recent empirical evidence) and that too much finance may be detrimental to growth. We also show that the degree of financial development may affect the speed of convergence, which suggests that finance may play a crucial role in determining the length of the recovery process associated with exogenous shocks. Moreover, in a special case of the model, we observe that, under a realistic set of parameters, social welfare decreases with financial development, meaning that even when finance positively affects economic growth the short‐term costs associated with financial activities more than compensate their long‐run benefits.     

Low level equilibrium trap,unemployment, efficiency of education system,child labour and human capital formation

This paper builds an overlapping generations household economy model to examine the impact of adult unemployment on the human capital formation of a child and on child labour, as viewed through the lens of the adult’s expectations of future employability. The model indicates that the higher the adult unemployment rate in the skilled sector, the lesser is the time allocated by an unskilled adult towards schooling of her child. We also find that an increase in the unskilled adult’s wage may or may not decrease child labour in the presence of unemployment. The model predicts that an increase in child wage increases schooling and human capital growth rate only if the adults in the unskilled sector earn less than subsistence consumption expenditure. As the responsiveness of skilled wage to human capital increases, schooling and human capital growth rates increase. The model dynamics bring out the importance of education efficiency and parental human capital in human capital formation of the child. In the case of an inefficient education system, generations will be trapped into low level equilibrium. Only in the presence of an efficient education system, steady growth of human capital is possible. Suitable policies that may be framed to escape the child labour trap are discussed as well.     

A two-sector Kaleckian model of growth and distribution with endogenous productivity dynamics

This study extends a two-sector Kaleckian model of output growth and income distribution by incorporating endogenous labour productivity growth. The model is composed of investment goods and consumption goods production sectors. The impact of a change in wage and profit shares on capacity utilisation and output growth rates at the sectoral and aggregate levels are identified. The study reveals short-run cyclical capacity utilisation rates and productivity growth dynamics. Even if the short-run steady state is stable, the capital accumulation rate in the consumption goods sector must decrease more than that in the investment sector for long-run stability. When simultaneous rises in profit shares in both the sectors affect long-run aggregate economic growth differently at a steady state, the distributional interests between the same class in different sectors may hamper the long-run economic growth. A policy message is that the effect of income distribution on industrial output growth is not always beneficial. These phenomena are specific to two-sector models and cannot be observed when using conventional aggregate growth models.     

The transition to a globalized economy: Poverty,human capital and the informal sector in a structuralist CGE model

Recent econometric evidence suggests that trade liberalization has an elusive relationship to growth and income distribution. This paper provides an explanation for these results via numerical simulations of a dynamic structuralist CGE. The conclusion is that if families become too poor to finance human capital accumulation, or the state too stingy to supply it at a reasonable cost, exports of skill-intensive goods can become uncompetitive and the transition to openness may involve increasing poverty, unemployment and stagnation. The model design incorporates an informal sector as well as accumulation of human capital. The paper simulates two trajectories, a “green” path in which per capita income grows steadily with a rapid rate of human capital accumulation and a reduction in the level of economic informality. A second, or “red” path is also possible, however, with a growth rate that is much lower, an expanding informal sector and an inadequate rate of human capital formation.     

Institutions,human capital,and growth: The institutional mechanism

This paper contributes to the debate on the relationship between human capital, institutions, and economic growth. The paper first develops a micro-foundation model linking institutions to human capital. The advantage of our modeling strategy is that the human capital accumulation function is derived from an endogenous process. The theoretical model shows that improvements in the quality of institutions foster human capital accumulation, decrease income inequality and change the historical development path. The paper uses cross-country panel data from 1965 to 2005 to test some of the model's propositions and finds that deep structures or structural institutions – which are very persistent and rooted on the historical development path of an economy – affect long-term economic performance, while political institutions are uncorrelated with productivity and long-term economic growth. The empirical estimates also show that growth of physical and human capital – instead of levels – determines long-run economic growth.     

Green Attitude and Economic Growth

We analyze the interdependence between green attitude and equilibrium development of environmental quality in an endogenous growth model. Individuals take only part of their impact on pollution into account, hence there is a negative externality of capital accumulation on environmental quality. Increasing wealth or increasing pollution enhance green attitude and reduce the externality, because individuals care more about the environment if their income is higher or if pollution is more obvious. The time path of pollution as well as the evolution of equilibrium growth are shown to depend crucially on the determinants of green attitude. Ongoing growth may lead to complete internalization of the environmental externality if green attitude improves with increasing wealth, e.g. as a consequence of an increase in environmental education. In contrast, if green attitude is determined exclusively by the level of environmental quality, pollution remains at a suboptimally high level. The interdependence of wealth and pollution in the determination of environmental awareness implies more complex dynamics. Capital growth enhances green attitude and thereby decreases pollution. Improved environmental quality in turn may increase capital growth due to less green attitude and therefore slow down convergence to the sustainable balanced growth path.     

Credit constraints,growth and inequality dynamics

This paper examines how credit constraints affect the dynamics of wealth and thereby the dynamics of capital and output growth. We develop standard Ak growth models that display transitional dynamics, contrary to general belief, once the complete credit markets assumption is relaxed. The mechanism is that credit constraints make individual productivity differences persist, which in turn leads to the persistence of income inequality. The dynamics of inequality is jointly determined with the dynamics of aggregate capital. The economy thus passes through a transitional period of inequality, individual and aggregate capital dynamics before it converges to a long-run balanced growth path. The application of the model to the analysis of intergenerational mobility and inequality dynamics suggests substantial economic and policy significance. In particular, introducing credit constraints to the Barro Ak model, public investment could have an indirect impact on growth via its effect on inequality and mobility.     

Factor-biased public capital and private capital crowding out

This paper studies the dynamic effects of public investment on private capital accumulation in a general equilibrium macroeconomic model of a small open economy with factor-biased public capital. I show that public investment induces rather complex private capital dynamics—falling in the short and in the long run, but potentially increasing along transition—if public capital augments private capital and private inputs are gross complements in production. Whether private investment is crowded in or out during transition critically depends on parameters that are empirically hard to measure, such as the labor supply elasticity and the elasticity of substitution between private inputs—a small increase in the latter from 0.5 to 0.6, for instance, turns a totally negative transitional effect into a predominantly positive one. These results help rationalize the lack of empirical consensus on the relationship between public and private investment.     

A Spatial Econometric Analysis of Cultural Dimensions,Technology Knowledge and Economic Growth

Using data from 65 countries over the period 1980–2003, this paper investigates the role that cultural dimensions play in the process of technological change, innovation and adoption and consequently on the steady state level of output per worker and its growth, using spatial econometrics techniques to account for spatial dependence between countries. Initial findings indicate that differences across cultural dimensions act as a leveling effect but not as long run growth determinants. In addition, when controlling for physical and human capital accumulation, culture plays a much smaller role in explaining differences in income per capita than initially thought, with little effect on output per worker growth along the transitional dynamics path. Spatial econometric considerations are relevant in explaining differences across rates of growth of per worker output, but not in terms of steady‐state levels of income.     

Infrastructure Investment and Maintenance Expenditure: Optimal Allocation Rules in a Growing Economy

This paper studies the allocation of public expenditure between infrastructure investment and maintenance in an endogenous growth framework. In the basic model, maintenance spending affects both the durability and efficiency of public capital. The balanced growth path is derived and transitional dynamics associated with a revenue-neutral increase in expenditure on maintenance are analyzed. The model is then extended to account for the possibility that public spending on maintenance affects also the durability of private capital. The growth-maximizing tax rate and share of infrastructure investment are calculated in both cases. First- and second-best welfare-maximizing solutions are also discussed.