Economic Growth and Macroeconomic Dynamics: Recent Developments in Economic Theory PDF
Preview Economic Growth and Macroeconomic Dynamics: Recent Developments in Economic Theory
This page intentionally left blank ii ii ECONOMICGROWTHANDMACROECONOMICDYNAMICS Interest in growth theory was rekindled in the mid-1980s with the develop- mentoftheendogenousgrowthmodel.Incontrasttotheearlierneoclassical model in which the steady-state growth rate was tied to population growth, long-runendogenousgrowthemergedasanequilibriumoutcome,reflecting thebehaviorofoptimizingagentsintheeconomy.Thisbookbringstogether a number of contributions in growth theory and macroeconomic dynamics thatreflectthesemorerecentdevelopmentsandtheongoingdebateoverthe relativemeritsofneoclassicalandendogenousgrowthmodels.Itfocuseson threeimportantaspectsthathavebeenreceivingincreasingattention.First, itdevelopsanumberofgrowthmodelsthatextendtheunderlyingtheoryin different directions. Second, it addresses one of the concerns of the recent literatureongrowthanddynamics,namelythestatisticalpropertiesoftheun- derlyingdataandtheefforttoensurethatthegrowthmodelsareconsistent withtheempiricalevidence.Third,macrodynamicsandgrowththeoryhave focusedincreasinglyoninternationalaspects,aninevitableconsequenceofthe increasingintegrationoftheworldeconomy. Steve Dowrick is Professor and Australian Research Council Senior Fellow in the School of Economics, Australian National University. He is coeditor withIanMcAllisterandRiazHassanofTheCambridgeHandbookofSocial SciencesinAustralia(CambridgeUniversityPress,2003)andauthorofnumer- ouspapersinleadingjournalsineconomicsincludingtheAmericanEconomic Review,theReviewofEconomicsandStatistics,andtheEconomicJournal.A FellowoftheAustralianAcademyofSocialSciences,ProfessorDowrick’scur- rentresearchfocusesonthefactorspromotingaswellasdeterringconvergence foreconomicgrowth. RohanPitchfordteacheseconomicsintheAsiaPacificSchoolofEconomics and Management of the Australian National University. His research inter- ests are in law and economics, industrial organization, and contract theory andapplication,includingcreditorliabilityandtheeconomicsofcombining assets.Dr.Pitchford’spapershaveappearedintheAmericanEconomicRe- view, the Journal of Economic Theory, and theJournal of Law, Economics, andOrganization,amongotherrefereedpublications. StephenJ.TurnovskyisCastorProfessorofEconomicsattheUniversityof Washington,Seattle,andpreviouslytaughtattheUniversitiesofPennsylvania, Toronto,andIllinois,Urbana-Champaign,andtheAustralianNationalUni- versity. Elected a Fellow of the Econometric Society in 1981, he coedited withMathiasDewatripontandLarsPeterHansentheSociety’sthree-volume AdvancesinEconomicsandEconometrics:TheoryandApplications,Eighth World Congress (Cambridge University Press, 2003). He has written four books, including International Macroeconomic Dynamics (MIT Press, 1997) andMethodsofMacroeconomicDynamics:SecondEdition(MITPress,2000), andmanyjournalarticles.Hiscurrentresearchinmacroeconomicdynamics andgrowthcoversbothclosedandopeneconomies. i ii Economic Growth and Macroeconomic Dynamics Recent Developments in Economic Theory Editedby STEVE DOWRICK AustralianNationalUniversity ROHAN PITCHFORD AustralianNationalUniversity STEPHEN J. TURNOVSKY UniversityofWashington iii Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo Cambridge University Press The Edinburgh Building, Cambridge , UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521835619 © Cambridge University Press 2004 This publication is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published in print format 2004 - ---- eBook (EBL) - --- eBook (EBL) - ---- hardback - --- hardback Cambridge University Press has no responsibility for the persistence or accuracy of s for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. Contents Preface pagevii Contributors xiii PARTONE.TOPICSINGROWTHTHEORY 1 GrowthandtheElasticityofFactorSubstitution 3 JohnD.Pitchford 2 RelativeWealth,CatchingUp,andEconomicGrowth 18 NgoVanLongandKojiShimomura 3 KnowledgeandDevelopment:ASchumpeterianApproach 46 PhillipeAghion,CeciliaGarc´ıa-Pen˜alosa,andPeterHowitt PARTTWO.STATISTICALISSUESINGROWTH ANDDYNAMICS 4 DelinearizingtheNeoclassicalConvergenceModel 83 SteveDowrick 5 BifurcationsinMacroeconomicModels 95 WilliamA.BarnettandYijunHe PARTTHREE.DYNAMICISSUESININTERNATIONAL ECONOMICS 6 DynamicTradeCreation 115 EricO’N.FisherandNeilVousden 7 SubstitutabilityofCapital,InvestmentCosts, andForeignAid 138 SantanuChatterjeeandStephenJ.Turnovsky 8 MicrochurningwithSmoothMacroGrowth:TwoExamples 171 RonaldW.Jones Index 179 v vi Preface Economic growth continues to be one of the most active areas in macroeconomics. Early contributions by Robert Solow (Quarterly Journal of Economics, 1956) and Trevor Swan (Economic Record, 1956) laid the foundations for the research that was conducted dur- ing the next 15 years or so. Intense research activity continued until the early 1970s, when, because of inflation and oil shocks, interests in macroeconomics were redirected to issues pertaining to short-run macroeconomic stabilization policies. Interest in growth theory was rekindled in 1986 with the contribution by Paul Romer (Journal of Political Economy, 1986) and the development of the so-called en- dogenous growth model. In contrast to the earlier models in which the steady-state growth rate was tied to the population growth rate and, thus, was essentially exogenous, the long-run growth emerged as an equilibrium outcome, reflecting the behavior of the optimizing agents in the economy. Research in growth theory is continuing and is now much more broadly based than the earlier literature of the 1960s. Thisbookbringstogetheranumberofcontributionsingrowththe- oryandmacroeconomicdynamicsthatreflectthesemorerecentdevel- opmentsandongoingdebatesovertherelativemeritsofneoclassical andendogenousgrowthmodels.Insodoing,wefocusonthreeareas that have received attention recently. First, we develop a number of growthmodelsthatextendthetheoryindifferentdirections.Second, oneconcernoftherecentliteratureingrowthanddynamicsisonthe statistical properties of the underlying data and on trying to ensure that the growth models are consistent with the empirical evidence. Third,macrodynamicsandgrowththeoryhasfocusedincreasinglyon vii viii Preface international aspects, no doubt a reflection in part of the increasing integrationoftheworldeconomy. The idea for this book was stimulated in part by the writings of JohnPitchford,anemeritusprofessorattheAustralianNationalUni- versity (ANU), who has worked extensively in the general area of macrodynamics over the past 40 years, making many seminal contri- butions.Perhapsmostnotableisthefactthathis1960paperpublished in the Economic Record was in fact the first published formulation and analysis of the constant elasticity of substitution (CES) produc- tionfunction,whichofcoursehasbeenacentralrelationshipinboth theoretical and quantitative macroeconomics since then. Most peo- pleareunawarethatthePitchfordpaperactuallypredatestheArrow, Chenery,Minhas,andSolowpaper(ReviewofEconomicsandStatis- tics, 1961), but that is in fact the case. In his paper, Pitchford also demonstrated that, for a high elasticity of substitution, the equilib- rium in his model might involve ongoing growth, making it an early (but not the earliest) example of an endogenous growth model as well.Pitchfordalsomadeimportantcontributions,ofbothatheoret- ical and statistical nature, in international macroeconomics, includ- ing work on the current account. Thus, the purpose of this book is tobringtogetherhigh-levelcontemporarycontributionsinsome(but notall)oftheareasofmacrodynamicswithwhichPitchfordhimselfis associated. Itwillbeapparenttoreadersofthisvolumethatithasadistinctly “Australian” and, more specifically, “ANU” flavor. Indeed, Trevor SwanhimselfwrotehisseminalpaperattheANU,whereasPitchford’s 1960paperwaswrittenduringtheperiodhewasattheUniversityof Melbourne,shortlybeforehejoinedtheANU.Infact,theANUhasa strongtraditioninmacroeconomicdynamicsinwhichJohnPitchford has played a pivotal role. Back in 1977, he and Stephen Turnovsky edited a collection of ANU papers titled Applications of Control Theory to Economic Analysis and published by North-Holland. This wasoneofthefirstcomprehensivesetsofpapersintheareaandhad some influence in this growing area over the subsequent years. Ac- cordingly, in selecting the papers, and in part to honor this tradition spearheadedbyPitchford,most(butnotall)oftheauthorshavesome Australian, and in particular some ANU connection, either as for- merstudents,colleagues,orvisitors.Weviewthisassignificant,since
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