Growth,unemployment and public capital

Abstract. Existing literature has studied the growth effects of fiscal policy in models with full-employment. The aim of this paper is to study these growth effects in an endogenous growth model with unemployment and compare them with the effects obtained when there is full-employment. To this end, we assume that unemployment arises due to the existence of unions. We also assume that the government finances, by means of income taxes, both public capital and an unemployment benefit. Public capital increases total factor productivity and modifies the elasticity of the labor demand. We show that the effects of fiscal policy on both employment and growth crucially depend on the relation between this elasticity and public capital. We would like to thank Jordi Caballé, Fernando Sánchez, Manuel Santos and an anonymous referee for their helpful comments. Sorolla is grateful for financial support to Spanish Ministry of Education through DGICYT grant SEC2000-0684 and to Generalitat de Catalunya through grant SGR2001-164. Raurich is grateful to Universitat de Girona for financial support through grant 9100075.     

A model with endogenously determined cycles, discounting and growth

Summary. This article reexamines the role of consumption in growth and emphasises the external effects of aggregate consumption, viewed as consumption standards, as an additional impediment in the growth process. These external effects raise the productivity of the individuals and are positively related to their valuation of the future. Conditions are established under which this results in a marginal value of wealth that is an increasing function of consumption. This brings new types of multiple steady states, local indeterminacies and cyclical motions. Imposing extra homogeneity restrictions, balanced growth solutions with endogenous impatience emerge. The possibility of multiple convergent paths is univocally related to endogenous discount effects. A comparison with a benchmark planning economy indicates an excessive value for the rate of time preference and emphasises its insufficient adaptation to future utility in a stationary setting. Discrepancies along the transition path that rest on endogenous impatience versus fixed discount appear in a non-stationary environment when the competitive balanced growth solution is indeterminate. Received: May 5, 1996; revised version: May 19, 1997     

The quality of human capital,educational reform and economic growth

Using a general equilibrium growth model with a costly schooling process, this paper analyses the effect on economic growth of educational reform that allocates more resources to the schooling sector to raise the quality of human capital. It shows that the positive effect of improved quality on the economic growth could be offset by the reverse effect of reduced human capital formation that arises from the distortion of resource reallocation. An appropriate tax-subsidy scheme is shown to remove this reverse effect of educational reform.     

A comparison between the log-linear and the parameterized expectations methods

This paper compares the performance of a log-linear method and a parameterized expectations method in solving a dynamic general equilibrium endogenous growth model with human capital. Quantitative evaluation based on second moment statistics shows that the results provided by the two numerical methods are very similar in this framework whenever the propagation mechanism of technology shocks is weak. However, the cross correlations of some relevant variables in the RBC literature obtained from the two methods are significantly different when the model exhibits a strong propagation mechanism. The parameterized expectations method captures the sensitiviness of second moment statistics to the curvature of the utility function while the log-linear method does not.     

The role of diminishing returns in neo-Schumpeterian growth theory

Summary. This paper generalizes Segerstrom [5], a dynamic general equilibrium model of endogenous growth through quality improvements in which innovation and imitation are modeled as the outcomes of research and development (R&D) races. Specific factors introduced into the technologies of both R&D activities achieve diminishing returns to scale in R&D. The comparative-static results of subsidies to R&D activities depend on the degree of diminishing returns to scale in R&D. When there is (is not) a sufficient degree of diminishing returns to R&D, a subsidy to innovative activity increases (decreases) innovative activity. Received: July 8, 1994; revised version: June 9, 1997     

Spatial growth and industry age

Between 1970 and 2000 employment growth across U.S. counties exhibited very different patterns in manufacturing and services. Whereas manufacturing employment growth was negatively related to initial manufacturing employment across the entire distribution of counties, service employment growth was positively related to initial service employment for intermediate sized counties. This paper presents a theory to rationalize these facts. Local sectoral growth is driven by technological diffusion across space and depends on the age of the sector. The theory correctly predicts the relation between county employment growth and initial county employment in manufacturing at the turn of the 20th century.     

Marshallian Externalities in Innovation

A quality ladder model is used to test for Marshallian externalities in innovation. The model predicts that, in the absence of spillovers, the geographical distribution of research should be the same as that of production. This hypothesis is strongly rejected: innovation in two-digit industries exhibits strong spatial clustering independently of the distribution of employment. We find also, in support of Romer and Lucas, that there are strong spillovers from aggregate innovative activity in a region to the research intensity of individual industries. The location of a sector's R&D activity is determined more by the location of other sectors' innovation than by the location of its own production.     

Endogenous strength of intellectual property rights: Implications for economic development and growth

The key institution that determines sustained growth in R&D-based growth models is the strength of intellectual property rights, which are usually assumed to be exogenous. In this paper we endogenize the strength of the intellectual property rights and show how private incentives to protect these rights affect economic development and growth. Our model explains endogenous differences in intellectual property rights across countries as private incentives to invest in property rights generate multiple equilibria. We show that the resulting institutional threshold offers an explanation for why the effect of a transfer of institutions from one country to another depends on the quality of the institutions that were imported.     

Absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment on economic growth

This study examines the effects of foreign direct investment (FDI) and equity foreign portfolio investment (EFPI) on economic growth using data on 80 countries from 1979 through 1998. The results largely suggest that lagged FDI and EFPI do not have direct, unmitigated positive effects on growth, but some data are consistent with the view that the effects of FDI and EFPI are contingent on the ‘absorptive capacity’ of host countries, with particular respect to financial or institutional development. Moreover, extreme bound analysis (EBA) of significant results indicates that the estimates are robust compared to other empirical studies on growth.     

Capital market imperfections in a monetary growth model

Summary. We consider a monetary growth model essentially identical to that of Diamond (1965) and Tirole (1985), except that we explicitly model credit markets, a credit market friction, and an allocative function for financial intermediaries. These changes yield substantially different results than those obtained in more standard models. In particular, if any monetary steady state equilibria exist, there are generally two of them; one of these has a low capital stock and output level, and it is necessarily a saddle. The other steady state has a high capital stock and output level; either it is necessarily a sink, or its stability properties depend on the rate of money creation. It follows that monetary equilibria can be indeterminate, and nonconvergence phenomena can be observed. Increases in the rate of money creation reduce the capital stock in the high-capital-stock steady state. If the high-capital-stock steady state is not a sink for all rates of money growth, then increases in the rate of money growth can induce a Hopf bifurcation. Hence dynamical equilibria can display damped oscillation as a steady state equilibrium is approached, and limit cycles can be observed as well. In addition, in the latter case, high enough rates of inflation induce the kinds of “crises” noted by Bruno and Easterly (1995): when inflation is too high there are no equilibrium paths approaching the high-activity steady state. Received: November 18, 1995; revised version: March 26, 1996     

Credit market imperfections, income distribution, and capital accumulation

Summary. This paper builds a model in which the distribution of income matters for capital formation, and uses it to analyze the effects of a simple policy intended to create a more equal distribution of income on the severity of certain credit market imperfections and, through this channel, capital accumulation. A neoclassical growth model is developed in which some capital investment must be externally financed, and external finance is subject to a standard costly state verification (CSV) problem. In particular, some fraction of the population is capitalists, who have access to risky but high return capital production technologies. Successful capitalists leave bequests to their offspring, thereby permitting them to internally finance some fraction of their own investment projects. However some external finance is also required. This is provided by workers who save out of labor income. As is well known, the greater the capability of capitalists to provide internal finance, the less severe is the CSV problem. Thus bequests mitigate credit market frictions and, in that sense, promote financial market efficiency and capital accumulation. However, they also perpetrate income inequality. The structure is used to show that a policy that taxes the bequests of capitalists, and transfers the proceeds to workers, necessarily reduces the steady state capital stock. Indeed, when this effect is sufficiently strong, these redistributive tax/transfer schemes can reduce the total (wage plus transfer) incomes of workers, as well as their welfare. Thus some simple policies intended to redistribute income can be highly counterproductive.Received: June 3, 1996; revised version: February 4, 1997This revised version was published online in February 2005 with corrections to the cover date.     

A Pearson's test for symmetry with an application to the Spanish business cycle

In this paper, we look for asymmetries in the Spanish business cycle. To that end, we firstly propose an easy nonparametric testing procedure to test for symmetry based on a Pearson's chi-squared statistic, which we call P-test. Then, we test for two popular forms of asymmetry, deepness and steepness, using a battery of nonparametric tests. In addition, we analyse possible complementarities between the tests used in this paper, and we compute p-value adjustments for multiple tests.     

The role of domestic demand in the economic growth of Malaysia: a cointegration analysis

For the past four decades (1961-2000), the Malaysian economy grew at an impressive average rate of 6.8% per annum. The rapid growth has been attributed, in part, to the tremendous success in the export-oriented industrialization policy. Several empirical studies on export-led growth for Malaysia have, however, led to inconclusive and mixed results. This may be due to the exclusion of domestic demand in the bivariate or multivariate models used in the studies. This study re-examines the role of domestic demand in economic growth in Malaysia. Using a three-variable cointegration analysis, the study shows that there exist short run bilateral causalities among the three variables, which implies that both the export-led growth and domestic demand-generated growth hypotheses are at least valid in the short run. On the other hand, the results are not supportive of the export-led growth hypothesis in the long run. Instead, the highly significant positive impact of domestic expenditure on economic growth implies that use of domestic demand as the catalyst for growth is appropriate.     

The role of simulation methods in Macroeconomics

After reviewing the reasons to use solution methods in macroeconomics, this survey paper discusses different aspects relative to a rigorous use of the numerical output of such methods. Special attention is paid to suggestions that have been made to incorporate parameter uncertainty. Finally, the need to test for usually maintained assumptions, such as rationality of expectations, is emphasized.     

Stability, global dynamics and Markov equilibrium in models of endogenous economic growth

This paper studies the local and global dynamics of two-sector models of endogenous growth with economy-wide external effects and taxes on capital and labor. The local analysis classifies the parameter space depending on the number of stationary solutions and local stability of equilibria. The global analysis shows that if taxes are within certain bounds and the size of the external effects on the average level of human capital is smaller than the share of physical capital, the equilibrium path is monotone and therefore a continuous Markov equilibrium can be constructed.     

On capital accumulation paths in a neoclassical stochastic growth model

Summary. Boldrin and Montrucchio [2] showed that any twice continuously differentiable function could be obtained as the optimal policy function for some value of the discount parameter in a deterministic neoclassical growth model. I extend their result to the stochastic growth model with non-degenerate shocks to preferences or technology. This indicates that one can obtain complex dynamics endogenously in a wide variety of economic models, both under certainty and uncertainty. Further, this result motivates the analysis of convergence of adaptive learning mechanisms to rational expectations in economic models with (potentially) complicated dynamics. Received: June 21, 1996; revised version: October 31, 1996     

On the role of money in a business cycle model of a small open economy: The case of Spain

This paper examines the consequences of introducing a cash-in-advance constraint into a small open economy business cycle model for the Spanish case. A business cycle model is built extending Correia, Neves and Rebelo's (1995) small open economy framework and Cooley and Hansen's (1995) monetary economy. Money is introduced through a cash-in-advance constraint. The stochastic simulation of the model and its comparison to Spanish data show that the model is able to mimic i) the Dolado et al. puzzle, that is, the high volatility of private consumption for this economy; ii) the Dunlop-Tarshis observation, i.e., the negative correlation between real wages and hours worked; and iii) some cyclical features of the nominal dimension.     

Terms of trade volatility,government spending cyclicality,and economic growth

This paper presents estimates of the effects that terms of trade volatility has on real gross domestic product (GDP) per capita growth. Based on 5‐year nonoverlapping panel data comprising 175 countries during 1980 to 2010, the paper finds that terms of trade volatility has significant negative effects on economic growth in countries with procyclical government spending. In countries where government spending is countercyclical, terms of trade volatility has no significant effect on growth. Conditional on the mediating role of government spending cyclicality, the GDP share of domestic credit to the private sector has no significant effect on the relationship between growth and terms of trade volatility.     

Funded social security and economic growth

This paper investigates the relationship between economic growth and a fully funded social security system in an overlapping generations model with family altruism. It is shown that funded social security may harm growth if there are operative bequests within the family.     

Research & development and growth: A Bayesian model averaging analysis

We examine the effect of research and development (R&D) on long-term economic growth using the Bayesian model averaging (BMA) to deal rigorously with model uncertainty. Previous empirical studies, which applied BMA, investigated the effect of dozens of regressors on long-term growth, but they did not examine the effect of R&D due to data unavailability. We extend these studies by proposing to capture the investment in R&D by the number of Nobel prizes in science. Using our indicator, the estimates show that R&D exerts a positive effect on long-term growth. This result is robust to many different parameter and model prior structures as well as to alternative definitions of R&D indicator.