The dynamic effects of general purpose technologies on Schumpeterian growth

General purpose technologies (GPTs) are drastic innovations characterized by pervasiveness in use and innovational complementarities. The dynamic effects of a GPT are analyzed within a quality-ladders model of scale-invariant Schumpeterian growth. The diffusion path of a GPT across a continuum of industries is governed by S-curve dynamics. The model generates a unique, saddle-path long-run equilibrium. Along the transition path, the measure of industries that adopt the new GPT increases, consumption per capita falls, and the interest rate rises. The growth rate of the stock market depends negatively on the rate of GPT diffusion and the magnitude of the GPT-ridden R&D productivity gains; and positively on the rate of population growth. It also follows a U-shaped path during the diffusion process of the new GPT. Finally, the model generates transitional growth cycles of per capita GNP.JEL Classification: E3, O3, O4I would like to thank Elias Dinopoulos for encouragement, and for constructive comments and suggestions. I would also like to thank David Figlio, Douglas Waldo, Steven Slutsky and participants in the 9th Biennial Congress of the International Schumpeter Society for useful discussions and suggestions. Any remaining errors are my own responsibility.     

Information aggregation and investment cycles with strategic complementarity

This paper studies the interaction between information aggregation and investment cycles with investments exhibiting strategic complementarity. The composition of information aggregation varies across different phases of cycles, which in turn affects the course of investment cycles. The phases of cycles are history dependent for informational reasons, and changes in phases depend on the growth rate of aggregate investment: a slowdown in growth is interpreted as bad news and a slowdown in downturn is considered as good news. A small structural change in low cost investments can have a large effect on the pattern of cycles. Investment cycles might be characterized by sudden crashes and slow recoveries.     

The Galor–Weil model revisited: A quantitative exercise

The long-run growth model of Galor and Weil [Galor, O., Weil, D., 2000. Population, technology, and growth: From Malthusian stagnation to the demographic transition and beyond. American Economic Review 90, 806–829] is examined quantitatively. We first give parametric forms to some functions which were only given on general form in the original article. We then choose numerical parameter values in line with calibrations of related long-run growth models, and with data. Finally, we simulate the model. We find, inter alia, that the time paths for population, and other variables, display oscillatory behavior: they move in endogenous cycles. As the economy transits from Malthusian stagnation to modern growth these oscillations die out. This is consistent with population growth rates fluctuating considerably in historical data, but having stabilized in modern economies. We also show that these cycles are not an artifact of the two-period life setting: allowing adults to live on after the second period of life with some probability does not make the oscillations go away. Rather, the cycles are driven by fertility being proportional to per capita income minus the parental subsistence requirement. When population is large, and per capita incomes close to subsistence, fertility is therefore sensitive to changes in population levels.     

Innovation, cycles and growth

The purpose of this paper is to present a model of growth with endogenous fluctuations. The main feature of our model is that it throws light on the relationships between long waves and business cycles in the economy. The driving forces in the model work in this way: endogenous R&D investment creates new cumulative knowledge. When this knowledge reaches a threshold H*, radical innovations occur which generate productivity growth via the substitution of old capital with new capital. These disruptive events appear recurrently, generating long waves and revitalizing the growth process. Short-term cycles in the model come from the interactions between these innovation-driven transformations and certain prey-predator mechanisms that involve the labor market. We find that our model presents excellent properties: the model generates endogenous cyclical growth as a disequilibrium process; persistent and irregular short cycles appear interwoven with the long waves; and there is a strong significant interaction between both kinds of fluctuations.     

Asset pricing in an Islamic economy

ABSTRACT

We define an Islamic economy as one with borrowing restrictions, no leverage, and no risk-free asset. We derive a consumption-based asset pricing model for this economy under standard preferences. We demonstrate that news to consumption growth is the main driver of Islamic financial markets, but the degree of borrowing constraints also affects the pricing of Islamic assets. Using Saudi Arabian data, simulations show that our model does a good job in matching the observed equity premium as well as the volatility of the market return. Our model implies that the price-dividend ratio predicts dividend growth, and as a result that prices are driven mainly by cash-flow news rather than by discount rate news. Empirical tests show that our model is consistent with the data.     

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.     

Rejuveniles and growth

Rejuveniles are “people who cultivate tastes and mind-sets traditionally associated with those younger than themselves” [Noxon, C., 2006. Rejuvenile. Crown Publishers]. In this paper, we study a standard AK growth model of overlapping generations populated by rejuveniles. For our purposes, rejuveniles are old agents who derive utility from “keeping up” their consumption with that of the current young. We find that such cross-generational keeping up is capable of generating interesting equilibrium growth dynamics, including growth cycles. No such growth dynamics is possible either in the baseline model, one where no such generational consumption externality exists, or for almost any other form of keeping up. Steady-state growth in a world with rejuveniles may be higher than that obtained in the baseline model.     

Deviant generations, Ricardian equivalence, and growth cycles

Two equilibrium possibilities are known to obtain in a standard overlapping-generations model with dynastic preferences: either the altruistic bequest motive is operative for every generation (in which case, Ricardian equivalence obtains) or it is not, for any generation. Dynamic equilibria, where the bequest motive is occasionally operative, cannot emerge. This paper studies bequest-giving behavior and out-of-steady-state bequest and growth dynamics in a Ak model with intra- and inter-generational consumption externalities. These externalities, by their very presence, do not destroy Ricardian equivalence. They may, however, give rise to deviant generations—generations that do not leave a bequest having received an inheritance, and vice versa—and that seals the fate for Ricardian equivalence. Consumption externalities may also generate interesting indeterminacies and endogenous growth cycles that did not exist otherwise.     

Can sustained economic growth and declining population coexist?

Most of the developed countries have been experiencing sub-replacement fertility. This leads to worries over the sustainability of economic growth in these countries. Given this concern, we ask the following questions: Is there a force that would allow economic growth and declining population to coexist? Is there a mechanism that could reverse the decline in fertility? We argue that returns to human capital in production provide the key to understanding this relation. Our theoretical framework predicts that, when the degree of increasing returns to human capital in traditional production technologies falls, advanced economies switch their productive efforts from labor-oriented technologies that require a constant creation of young workforce toward human capital-oriented technologies that support an ageing population. We call this shift the “endogenous efficiency-augmenting mechanism”. This suggests that sustained economic growth and a declining population can coexist in the long run. Finally, we compare our model against the data and find: (i) The degree of increasing returns to human capital has been falling over time throughout the world along with population growth rates. (ii) Increasing returns to human capital and population growth rates are positively correlated. (iii) Predictions of our model are consistent with what the data reveal.     

Renewable resources,property-rights regimes and endogenous growth

We extend Brander and Taylor's [Brander, J.A., Taylor, M.S., 1998. The simple economics of Easter Island: a Ricardo-Malthus model of renewable resource use. Am. Econ. Rev. 88, 119–138.] model of feast and famine cycles on Easter Island using Galor and Weil's [Gailor, O., Weil, D.N., 2000. Population, technology and growth: from Malthusian stagnation to the demographic transition and beyond, Am. Econ. Rev. 90, 806–28] model of endogenous technological advance, where technological change is related to the population. We note that different property-rights regimes will influence the relative direction of technological advance—whether that advance is in harvesting technologies or in technologies that influence the growth rate of some renewable biological resource. Property-rights regimes that favor biological growth rates over harvest rates tend to dampen feast–famine cycles, while those that favor harvest efficiency worsen such cycles.     

Government spending, interest rates, and capital accumulation in a two-sector model

This paper investigates dynamic impacts of a temporary fiscal expansion in a two-sector growth model. If the expansion falls on consumption-investment commodities, capital accumulation can be either promoted or reduced and the short-term interest rate unambiguously rises. If the expansion falls on consumption commodities, capital accumulation is crowded out and the short-term interest rate declines during the period of the fiscal expansion. It is also shown that fiscal spending on the consumption commodity can move the short- and long-term interest rates in opposite directions. JEL Classification: E43, E62, O41     

Consumer sentiment and countercyclical fiscal policies

We re‐explore the consequences of some popular countercyclical intervention rules in a simple Keynesian‐type macroeconomic model in which the dynamics of consumer sentiment and business cycles are intertwined. We find that fiscal policy does not only have a direct effect on national income via the well‐known Keynesian multiplier process but also an indirect effect by affecting consumer sentiment. The good news is that the indirect effect may amplify the direct effect and therefore increases a policy‐maker’s impact on national income. However, the bad news is that due to the interactions between the business cycle and the evolution of consumer sentiment, the stabilization of national income is an intricate matter.     

Growth,Death, and Taxes

Recent theories of endogenous growth suggest that changes in tax rates may permanently affect growth. However, attempts to quantify these growth effects have reached very different conclusions in spite of a common theoretical framework: the neoclassical growth model with human capital accumulation by infinitely lived households. This paper shows that a model which explicitly specifies human capital accumulation over the life-cycle provides sharper answers. In such a model, a plausible range for the growth effects of eliminating taxes in the United States is between 0.5 and 1.3 percentage points compared with 0 to 4 percentage points in the infinite horizon model. The much wider range found in the literature is due to two assumptions which are commonly viewed as innocuous simplifications but contrast sharply with traditional human capital theory: that households are infinitely lived and face constant point-in-time returns in human capital accumulation. The widely held view that long, finite horizons are closely approximated by infinite horizons is generally invalid. Abstracting from finite horizons leads to a systematic overstatement of the growth effects of taxes. Journal of Economic Literature Classification Numbers: J24, O41.     

The macroeconomic costs of conflict

Macroeconomic costs of conflict are generally very large, with GDP per capita about 28 percent lower ten years after conflict onset. This is overwhelmingly driven by private consumption, which falls by almost 25 percent ten years after conflict onset. Conflict is also associated with dramatic declines in official trade, with exports (imports) estimated to be 58 (34) percent lower ten years after conflict onset. The onset of conflict often also induces significant refugee outflows to neighboring non-advanced countries in the short run, and relatively small but very persistent refugee outflows to advanced countries over the long run. To alleviate reverse causality concerns between GDP and conflict onset, we control for pre-conflict GDP forecasts from the IMF World Economic Outlook and show that similar results are obtained with and without pre-conflict GDP forecasts.     

Growth Dynamics and Returns to Scale: Bifurcation Analysis

We investigate the dependence of the dynamic behavior of an endogenous growth model on the degree of returns to scale. We focus on a simple (but representative) growth model with publicly funded inventive activity. We show that constant returns to reproducible factors (the leading case in the endogenous growth literature) is a bifurcation point, and that it has the characteristics of a transcritical bifurcation. The bifurcation involves the boundary of the state space, making it difficult to formally verify this classification. For a special case, we provide a transformation that allows formal classification by existing methods. We discuss the new methods that would be needed for formal verification of transcriticality in a broader class of models. Journal of Economic Literature Classification Numbers: O41, O30.     

Differentiating between business cycles and growth cycles: evidence from 15 developed countries

Growth cycles are often mistaken for business cycles, although these two have different statistical properties. In order to differentiate between them in a statistically satisfactory manner, the Bayesian information criterion-(BIC) based model-selection approach is presented. Business cycles are described by the cyclical trend model, and growth cycles are described by the trend-plus-cycle model. Whether the observed time series is derived from business cycles or from growth cycles is determined as a result of model selection. It is shown via data-based simulations that the proposed method works well in most situations. Empirical results obtained for 15 countries suggest that the business cycle model is selected for five countries, the growth cycle model is selected for two countries and the trend-plus-noise model is selected for eight countries.     

Endogenous Cycles and Growth with Indivisible Technological Developments

When large, discrete technological improvements require the accumulation of research or infrastructural investment over time, growth paths display cyclical patterns even in the absence of any shocks. Particularly interesting equilibrium features of these cycles include declines in output and asymmetries in the cyclic patterns displayed during expansions and recessions.Journal of Economic LiteratureClassification Numbers: E22, E32, O41.     

Measuring the Rate of Technological Progress in Structures

How much technological progress has there been in structures? An attempt is made to measure this using panel data on the age and rents of buildings. The data are interpreted with the help of a vintage capital model where buildings are replaced with some chosen periodicity. The results indicate there has been significant technological advance in structures that accounts for an important part of economic growth.Journal of Economic LiteratureClassification Numbers: O3 and O4.     

Daily market news sentiment and stock prices

In recent years there has been a tremendous growth in readily available news related to traded assets in international financial markets. This financial news is now available through real-time online sources such as Internet news and social media sources. The increase in the availability of financial news and investor’s ease of access to it has a potentially significant impact on market stock price movement as these news items are swiftly transformed into investors sentiment which in turn drives prices. In this study, we use the Thomson Reuters News Analytics (TRNA) data set to construct a series of daily sentiment scores for Dow Jones Industrial Average (DJIA) stock index constituents. We use these daily DJIA market sentiment scores to study the influence of financial news sentiment scores on the stock returns of these constituents using a multi-factor model. We augment the Fama–French three-factor model with the day’s sentiment score along with lagged scores to evaluate the additional effects of financial news sentiment on stock prices in the context of this model using Ordinary Least Square (OLS) and Quantile Regression (QR) to analyse the effect around the tail of the return distribution. We also conduct the analysis using the seven-day simple moving average (SMA) of the scores to account for news released on non-trading days. Our results suggest that even when market factors are taken into account, sentiment scores have a significant effect on Dow Jones constituent returns and that lagged daily sentiment scores are often significant, suggesting that information compounded in these scores is not immediately reflected in security prices and related return series. The results also indicate that the SMA measure does not have a significant effect on the returns. The analysis using Quantile Regression provides evidence that the news has more impact on left tail compared to the right tail of the returns.     

TECHNOLOGICAL LEARNING AND LABOR MARKET DYNAMICS

The search‐and‐matching model of the labor market fails to match two important business cycle facts: (i) a high volatility of unemployment relative to labor productivity, and (ii) a mild correlation between these two variables. We address these shortcomings by focusing on technological learning‐by‐doing: the notion that it takes workers' time using a technology before reaching their full productive potential with it. We consider a novel source of business cycles, namely, fluctuations in the speed of technological learning, and show that a search‐and‐matching model featuring such shocks can account for both facts. Moreover, our model provides a new interpretation of recently discussed “news shocks.”