Informality and Long‐Run Growth

One of the most salient features of developing economies is the existence of a large informal sector. In this paper, we use quantitative theory to study the dynamic implications of informality on wage inequality, human capital accumulation, child labor, and long‐run growth. Our model can generate transitory informality equilibria or informality‐induced poverty traps. Its calibration reveals that the case for the poverty‐trap hypothesis arises: although informality serves to protect low‐skilled workers from extreme poverty in the short run, it prevents income convergence between developed and developing nations in the long run. Then we examine the effectiveness of different development policies to exit the poverty trap. Our numerical experiments show that using means‐tested education subsidies is the most cost‐effective single policy option. However, for longer time horizons, or as the economy gets closer to the poverty trap threshold, combining means‐tested education and wage subsidies is even more effective.     

Long‐Run Growth Differences and the Neoclassical Growth Model

This paper shows that allowing factor income share differences across countries in a modified Solow model can imply differences in output growth rates across countries. Using cross‐sectional data for 52 countries, an empirical illustration shows that the parameters of the modified model are intuitively plausible, jointly significant, and possess modest explanatory power (R² around 0.25). The paper emphasizes the methodological importance of simplifying assumptions on applied theory.     

Population Growth and Natural‐Resource Scarcity: Long‐Run Development under Seemingly Unfavorable Conditions

In this paper, I consider an economy that is constrained by the use of natural resources and driven by knowledge accumulation. Resources are essential inputs in all sectors. I show that population growth and poor input substitution are not detrimental but, on the contrary, are even necessary to obtain a sustainable consumption level. I find a general rule to define the conditions for a constant innovation rate. The rule does not apply to capital but to labor growth, which is the crucial input in research. Furthermore, the rule relates to the sectoral structure of the economy, and to demographic transition. The results continue to hold with a backstop technology, and are extended for the case of minimum resource constraints.     

Dynamic Analysis of an Endogenous Growth Model with Investment‐specific Technological Change

This paper examines a dynamically optimal subsidy policy in a continuous‐time version of the endogenous growth model developed by Krusell (Krusell, P. (1998) “Investment‐Specific R&D and the Decline in the Relative Price of Capital”, Journal of Economic Growth, vol. 3, no. 2, pp. 131–141), in which investment‐specific technological progress occurs endogenously because of R&D performed by monopolistic firms. It is demonstrated that a combination of the time‐invariant subsidy for investment and the time‐variant subsidy for R&D enables the market equilibrium to replicate the socially optimal allocation.     

Seasonal Cointegration and Long‐Run Neutrality of Money in the USA

Using the notion of seasonal cointegration and a monetarist model, this paper re‐examines the long‐run monetary neutrality hypothesis, based on the seasonally unadjusted quarterly data of the US over the period 1959Q1–2004Q4. The results indicate that money is cointegrated with price at all possible frequencies while real output is cointegrated with price only at an annual frequency. The cointegration between money and price at the zero frequency, and non‐cointegration between real output and money at all possible frequencies, suggests that money affects nominal but not real variables in the long run.     

Composition of International Assets and the Long‐run Current Account

We document the role of capital gains and losses for the current account that a country can sustain along a balanced growth path. While it is well know that growth allows a country to run a current account deficit and still keep its external debt stable as a share of GDP, the sensitivity of the current account to the composition of external assets and liabilities has received little attention. We show that this composition matters because several assets, such as equity or FDI, earn substantial capital gains that are not reflected in the current account. A country that is a net creditor in such assets can then sustain a larger current account deficit. Using a broad sample, we show that this aspect substantially tilts estimates of the long‐run current account towards a deficit among industrialized economies, with the opposite situation for emerging markets. We also show that industrialized economies are likely to benefit from predictable capital gains in the future.     

Long‐Run Impact of Biofuels on Food Prices

About 40 percent of US corn is now used to produce biofuels, which are used as substitutes for gasoline in transportation. In this paper, we use a Ricardian model with differential land quality to show that world food prices could rise by about 32 percent by 2022. About half of this increase is from the biofuel mandate and the rest is a result of demand‐side effects in the form of population growth and income‐induced changes in dietary preferences, from cereals to meat and dairy products. However, aggregate world carbon emissions would increase, because of significant land conversion to farming and leakage from lower oil prices.     

Aid,non‐traded goods,and growth

Abstract We examine the effects of foreign aid in a small recipient country with two traded goods, one non‐traded good, and two factors. Learning by doing and intersectoral knowledge spillovers contribute to endogenous growth. We obtain two main results. First, a permanent increase in untied aid raises (or lowers) the growth rate if and only if the non‐traded good is more capital intensive (or effective labour intensive) than the operating traded good. Second, a permanent increase in untied aid raises welfare if the non‐traded good is more capital intensive than the operating traded good; otherwise, it may raise or lower welfare.     

Animal spirits and the composition of innovation

This paper shows that the Schumpeterian model with both vertical and horizontal innovative research admits many more equilibria than the unique symmetric balanced growth path (BGP) usually highlighted in the literature. Each of a continuum of BGPs is characterized by a different composition of aggregate R&D (vertical versus horizontal).This appears if firms expect self-fulfilling “waves of enthusiasm” in the newly introduced sectors, as is very common in the real world. Pioneers are challenged by more outsiders and the first monopoly of every new good is likely to last less than in more mature industries: By expecting this horizontal innovation is depressed while vertical innovation is more intense. Such “waves of enthusiasm” have a positive effect on growth rates and a negative effect on consumption levels.     

Financial market participation and the developing country business cycle

I explore the implications of limited participation in financial markets on a standard small open economy business cycle model. Despite its parsimony, the limited participation model developed in this paper improves over the standard model in terms of explaining two important features of business cycle facts of developing countries: high volatility of consumption, and high negative correlation between the trade balance and output. Limited participation model is then used to inspect the effects of financial development and integration on macroeconomic volatility. Under a standard calibration, limited participation model leads to the conclusion that financial development and integration are associated with higher investment and output volatility. Effect of more participation on consumption volatility is dependent on the specification of the risk premium function.     

Terms‐of‐Trade Shocks and Exchange Rate Regimes in a Small Open Economy*

We examine the impact of terms‐of‐trade shocks on key macroeconomic variables by numerically solving a dynamic stochastic general equilibrium model of a small open economy. The model considers nominal price rigidity under different exchange rate regimes. The numerical solutions obtained are consistent with the empirical regularities documented by Broda (2004), in which output responses to shocks are smoother in floats than in pegs; in moving from pegs to floats, the rise in nominal exchange rate volatility is coupled by the rise in real exchange rate volatility; and in both exchange rate regimes, net foreign assets is the most volatile variable.     

Self-fulfilling prophecies in the quality ladders economy

If R&D difficulty increases as it accumulates, as recent evidence suggests, then there is a value in the diversification of the aggregate R&D efforts over the whole range of industries in the economy. However, this paper proves that the quality ladders models allow for self-fulfilling prophecies to divert R&D from an arbitrary number of sectors, with potentially dramatic effects on the dynamics of industry structure and on the long-run aggregate growth performance. Moreover, in developing countries, perfect markets might allow stagnant monopolies to resist despite the removal of fundamental entry barriers to dynamic competition. This kind of coordination failure implies potentially strong effects of socio-cultural factors on growth and suggests a positive role for public R&D policy even in a framework of semi-exogenous growth.     

Growth,R&D,and uncertainty

I develop and analytically solve the stochastic Romer model in which the creation of ideas is driven by a stochastic process. I show that higher uncertainty about R&D, through the reallocation effects of resources among sectors, slows down economic growth and deteriorates welfare. The results suggest that persistently high uncertainty tends to severely restrict the scope of sustained income growth.     

Firms’ skills as drivers of radical and incremental innovation

Using firm level data from the Irish Community Innovation Survey 2008–2010 we analyse the importance of eight skill sets for the innovation performance of firms. We distinguish between radical and incremental innovation. Our results suggest that there is substantial heterogeneity in the importance of skills for different types of innovation and that some skills are best sourced from outside the firm while others are best developed in-house.     

Asymmetric Information,Auditing Commitment,and Economic Growth

We analyze in this paper the growth and welfare consequences stemming from the lack of auditing commitment in a credit market with costly state verification. By studying two endogenous growth models, one of which allows lenders to commit to costly auditing strategies, whereas the other does not, we show that the inability to commit serves as a source of informational friction that results in more stringent contractual terms, which, in turn, result in lower capital accumulation, growth, and welfare. From the policy perspective, our analysis suggests a new micro‐economic channel through which institutional failings hinder economic growth and social welfare.     

Taxation In The Two‐Sector Neoclassical Growth Model With Sector‐Specific Externalities And Endogenous Labour Supply*

This paper examines the long‐run impacts of selective (or sector‐specific) commodity, payroll, and profit taxes in a two‐sector endogenous growth model with sector‐specific production externalities, in which one sector produces consumption goods and the other produces investment goods. The novelty of the model is that it allows not only for endogenous labour supply but also for the intersectoral allocation of resources, which may together lead to indeterminacy. We analytically show that the stability properties of the long‐run equilibrium critically affect the long‐run effects of these selective taxes, which may reverse the standard results of the growth effects of distortionary taxes.     

CLUSTER‐BASED INDUSTRIAL DEVELOPMENT: A VIEW FROM EAST ASIA*

In this paper I attempt to formulate an endogenous model of cluster‐based industrial development, based on case studies in Japan, Taiwan, and China, where the initiation phase is followed by the quantity expansion phase through imitation and subsequently by the quality improvement phase through innovation. I argue that such a process of industrial development is supported by the development of market transactions among assemblers, parts‐suppliers, and merchants, and the stimulation of innovation made possible by the benefits of industrial clusters arising from the geographical concentration of a large number of enterprises and a variety of human resources in a small geographical area.     

Donations in a recursive dynamic model

Abstract.  This paper studies how donations respond to unexpected permanent changes in income and tax rates in a recursive dynamic model. The dynamic approach yields several interesting insights. If marginal tax rates are progressive, a permanent jump in a household's income increases its consumption and donations in the short run, but has no effect in the long run. The permanent income elasticity of current donations is likely to exceed one. If the marginal tax rate is flat, the jump in income raises consumption and donations in both the short and the long run. A permanent marginal tax rate cut raises consumption and donations in the long run if marginal tax rates are progressive, while it reduces donations in the short run if it has little direct impact on tax payments. If the marginal tax rate is flat, a tax cut has a positive effect on consumption in both the short and the long run, but has an ambiguous effect on donations.     

RE‐EXAMINATION OF THE GROWTH‐ENHANCING BUBBLE

We investigate the growth and welfare effects of the bubble that arise on equities on newly created firms by R&D activities. Considering an economy where the input to the R&D sector is the final goods financed by the savings of the household sector, we show that such a bubble has a growth‐enhancing effect under the condition opposite to the previous literature. We also explore the characteristics of the steady state equilibrium with the bubble and demonstrate that there can be dual bubbly equilibria, one of which is unstable and the other stable, and that the growth and welfare effects of an unexpected permanent change in the initial bubble are very different depending on which equilibrium the economy stays in.     

ENDOGENOUS FLUCTUATIONS IN TWO‐COUNTRY MODELS*

This paper investigates the interlinkage in the business cycles of large‐country economies in a free‐trade equilibrium. We consider a two‐country, two‐good, two‐factor general equilibrium model with Cobb‐Douglas technologies and linear preferences. We also assume decreasing returns to scale in the consumption good sector. We first identify the determinants of each country's global accumulation pattern in autarky equilibrium, and secondly we show how a country's business cycles may spread throughout the world once trade opens. We thus give capital intensity conditions for local and global stability of competitive equilibrium paths.