Only income diverges: A neoclassical anomaly

The neoclassical growth model (NGM) is only consistent with the absolute divergence in output levels we observe if some determinants of steady state income are also diverging. In this paper we show that accumulation rates of physical and human capital are actually significantly converging, as are openness to trade and several variables measuring institutional quality. Output divergence in the face of input, policy and institutional convergence is a deep anomaly for the NGM.     

The symmetry of real purchasing power and the neoclassical monetary growth model

It has been argued that the usual instability property of the neoclassical monetary growth model can be removed if an asymmetric treatment of real purchasing power between the real and monetary sectors is eliminated, i.e., if the demand for money is made to depend on disposable income and not income. Basically, the argument is that this symmetry can offset the destabilizing forces of the Wicksell effect of the rate of inflation on the demand for money. We show that, under the usual stipulations of the model, the instability (saddle-point) nature of the model cannot be altered by such an argument.     

Rationality of liquidity preferences and the neoclassical monetary growth model

In the neoclassical monetary growth literature, the rationality condition in the sense of freedom from money illusion is imposed on the demand for nominal balances by assuming that this demand is homogenous of degree one in nominal income and nominal wealth. We argue that the price level should enter into this demand as a separate argument, and that the rationality condition should require that the demand be homogenous of degree one in nominal income, nominal wealth, and the price level. Then, the symmetry issue of the real purchasing power is consequential to the structure of the neoclassical monetary growth model.     

Predicting the pattern of international trade in the neoclassical model: a synthesis

I propose a framework that takes a set of conceivable outcomes as the primitive and a prediction is defined by identifying a subset on the set of conceivable outcomes. This notion of predictability serves as an organizing principle for characterizing pattern of trade predictions in single economy and integrated equilibrium formulations of the neoclassical trade model. I identify allocative efficiency as the unifying subset selection criterion for the different formulations of the neoclassical trade model, ranging from Ricardo’s (in Principles of Political Economy and Taxation, reprinted by J. M. Dent, London, in Everyman’s library, 1817) original comparative advantage formulation to the multi-cone Heckscher–Ohlin specification with multiple countries, goods and factors. I am grateful to comments from Jim Anderson, Chris Starmer, Catia Montagna, Peter Neary, two anonymous referees, as well as participants at the June 2007 GEP Conference on ‘New Directions in International Trade Theory’. I am grateful for financial support from NSF research grant SES-0452991 and from Leverhulme Trust Programme grant F114/BF.     

A fire sale without fire: An explanation of labor-intensive FDI in China

China's labor-intensive industries are characterized by low technology and high competition. The massive inflow of FDI in China's labor intensive industries is inconsistent with the conventional wisdom that FDI should be more prevalent in technology-intensive and low competition industries. To explain this puzzle, we offer a “fire sale” hypothesis: facing severe financial constraints, Chinese private firms give up their equity to form joint ventures with foreign firms in order to obtain financing. Using the garment industry as an example, we find that among domestic firms, the financial constraint index is highest for private firms and lowest for state-owned firms. We further estimate a probit model of joint-venture decisions by private firms. Our results suggest that those private firms with greater financial constraints are more likely to seek foreign joint ownership. The effect of financial constraints on joint venture decision is both statistically and economically significant.     

Corruption in a neoclassical growth model with a non-convex production function: comment

In Pereira and da Cruz Vieira (Int Rev Econ 57:335?C346, 2010), it is claimed that previous studies on corruption using the neoclassical growth model in the Ramsey tradition typically exploited a convex production function with productive government spending. Moreover, a non-convex intensive form technology representation is proposed as derived from the (presumptive) strictly convex function in levels. We show that none of these claims are true, for the general function is neither convex nor concave and fails to be linearly homogeneous. As a consequence, all the findings derived in Pereira and da Cruz Vieira (2010) are not peculiar to non-convex production functions.     

A structural model of the transition to agriculture

I develop a model of the transition to agriculture that can be estimated using cross-cultural data on the incidence of agriculture. The model allows for endogenous growth effects in which population density and technological sophistication are symbiotically related, and also allows for technological spillovers from centers of civilization. The model describes conditions under which population density and technological sophistication are likely to cause a switch to agriculture. Results suggest that endogenous growth affects are absent among hunter gatherers, but that technological spillovers are important in generating a switch to agriculture, and in generating technological change. Technology appears to diffuse more slowly along the north-south axis than along the east-west axis. Among agricultural peoples, endogenous growth effects appear to be present and important—a society that is 10% more technologically sophisticated has a population density about 5% larger, and a society with a 10% higher population density is on average 5% more technologically sophisticated. Hunter-gatherer population density appears to be independent of technology, but elastic with respect to environmental factors such as rainfall and habitat diversity.      

A neoclassical analysis of the Korean crisis

In late 1997, Korea experienced a huge and unusual economic crisis. The three main features of this crisis are the sudden recession, the rapid recovery and a consumption drop as large as the output drop. A large body of literature qualitatively explains the Korean crisis in terms of financial and monetary variables such as exchange rates and interest rates. This paper complements these studies by quantitatively analyzing fluctuations in real macroeconomic variables such as real GDP and consumption. A stochastic small open economy neoclassical model can quantitatively account for the Korean crisis taking TFP and real interest rates as exogenous.     

Nerlovian area response as an error correction model: An application to Western Canadian agriculture

The relationship between Nerlovian partial adjustment models and error correction models is explored. Unit root tests are employed to test stationarity of price, area and stock data of crops in the Canadian province of Saskatchewan. The data are found to be consistent with unit root non-stationarity. Evidence in favour of cointegrating relationships among area price and stock data is found. However, evidence in favour of the error correction form of the Nerlovian partial adjustment model is weak, indicating that more investigation of richer theoretical and empirical models of the short run dynamics of area response in Saskatchewan is needed.     

Technological catch-up: Gradual diffusion of technology and convergence in the neoclassical growth model

In this paper, I study the effects of the international gradual transmission of technology on the convergence processes among countries. In this way, the international gradual diffusion of technology makes possible a greater potential improvement capacity to the less developed country in its technological level. When this hypothesis is included in the Solow-Swan growth models, the paper shows that the convergence hypothesis will now be maintained only in the growth rates since a gap in income levels will remain in the long run. That conditional convergence will be explained by two factors: the diminishing returns for cumulative factor and the gradual diffusion of technology. I will finish this paper with empirical evidence of these two factors explaining convergence.     

A Kantian critique of neoclassical law and economics

Abstract

This paper outlines a critique of neoclassical law and economics based on the ethics of Immanuel Kant, focusing on four central topics: efficiency as the sole evaluative criterion for policy-making, hypothetical compensation in Kaldor–Hicks efficiency, the instrumental nature of rights and the assumption of reciprocal causation, and the role of punishment to both society and the individual. This overview addresses issues of concern not just to Kantians, but to anyone dissatisfied with the utilitarian foundations of law and economics and the amoral view of law upon which it is based.     

On Ramsey's conjecture: efficient allocations in the neoclassical growth model with private information

In his seminal paper of 1928, Ramsey conjectured that if agents discounted the future differently, in the long run all agents except the most patient would live at the subsistence level. The validity of this conjecture was investigated in different environments. In particular, it has been confirmed in the neoclassical growth model with dynamically complete markets. This paper studies this conjecture in a version of this model that includes private information and heterogeneous agents. A version of Bayesian implementation is introduced and a recursive formulation of the original allocation problem is established. Efficient allocations are renegotiation-proof and the expected utility of any agent cannot go to zero with positive probability if the economy does not collapse. If the economy collapses all agents will get zero consumption forever. Thus, including any degree of private information in the neoclassical growth model will deny Ramsey's conjecture, if efficient allocations are considered.     

Reassessing the empirical validity of the human-capital augmented neoclassical growth model

We reassess Mankiw, Romer and Weil's [mrw] version of the Solow model using, as did mrw, cross-sectional data to estimate the steady-state equation governing income per capita levels. The model fails in two critical areas. First, plausible factor shares obtained by mrw are not robust to the substitution of two measures of human capital that are more precise than the secondary school enrollment rates used by mrw. Second, the null hypothesis of an exogenous and identical level of technology in all countries is rejected. We also explain why the Solow model performed well despite the above shortcomings.     

Dynamic behavior of a simple neoclassical model with wealth and capital unequal

The paper analyzes the standard one-good neoclassical dynamic model in which wages to consumer-workers are paid in IOU's issued by producers. The wealth of consumers consists of their accumulated IOU's and the model differs from the traditional one in that it is not assumed that consumers' wealth is exactly equal to the value of the capital stock. The dynamic behavior of this model turns out to be quite different from the traditional one, the main result being that, in the absence of “excessive savings” by consumers, the golden rule will always be the unique stable steady state.     

East Asian growth experience revisited from the perspective of a neoclassical model

The business cycle accounting “wedge” methodology is used to identify the mechanisms driving the rapid growth of Hong Kong, Singapore, South Korea, and Taiwan since 1966. Analysis with a neoclassical growth model reveals that growth in these economies has been sustained by different mechanisms at different stages of development. Factor accumulation, which arises primarily from increases in capital wedges, accounts for most of the rapid growth in the earlier stages. However, in the later stages, total factor productivity growth becomes the primary driver.     

An optimal monetary policy in an aggregate neoclassical model of economic growth

This paper shows that the usual Ramsey-Cass-Koopmans optimal-growth theory is applicable to decentralized monetary economies and illustrates, with a simple model, how optimal growth can be achieved via a simple monetary policy. Securities and the endogeneity aspect of the money supply are explicitly introduced. This paper shows that the steady state under optimal growth is a saddle point, that the dynamic behavior of the capital-labor ratio and real per capita consumption is identical to that found in the usual literature in which money is not introduced, and that the optimal monetary policy is “counter-cyclical.”     

Towards a sustainable and efficient use of manure in agriculture: The Dutch case

Rapid increases in livestock production in the Netherlands have changed manure from a valuable input into a mere waste product. This is especially true for the southern and eastern parts of the country, where specialized pig and poultry farms have concentrated on sandy soils. As these farms generally own very little land, they largely depend on imported feedstuffs. As a consequence, manure is applied to the land in such large quantities that serious environmental problems have resulted: (1) eutrophication of surface water by phosphate emissions; (2) pollution of groundwater by nitrate emissions; and (3) acidification by ammonia emissions.In the last few years the Dutch government has developed a manure policy to counteract these effects. Our analysis of that policy has revealed at least three fundamental defects, which render the manure policy ineffective and inefficient. In this paper proposals are made to remove the defects in current manure policy. Much attention is paid to the problem of designing a mixture of policy instruments which is both effective as well as efficient in limiting the environmental problems caused by manure. It is shown that the use of financial incentives in regulation can substantially improve the efficiency of the manure policy. Finally, the main economic consequences of the proposed policy are examined for the public sector as well as for the agricultural sector.