http://individual.utoronto.ca/zheli/sa1.pdf

On the mechanics of economic development

This paper examines whether the Solow growth model is consistent with the international variation in the standard of living. It shows that an augmented Solow model that includes accumulation of human as well as physical capital provides an excellent description of the cross-country data. The paper also examines the implications of the Solow model for convergence in standards of living, that is, for whether poor countries tend to grow faster than rich countries. The evidence indicates that, holding population growth and capital accumulation constant, countries converge at about the rate the augmented Solow model predicts. This paper takes Robert Solow seriously. In his classic 1956 article Solow proposed that we begin the study of economic growth by assuming a standard neoclassical production function with decreasing returns to capital. Taking the rates of saving and population growth as exogenous, he showed that these two vari- ables determine the steady-state level of income per capita. Be- cause saving and population growth rates vary across countries, different countries reach different steady states. Solow's model gives simple testable predictions about how these variables influ- ence the steady-state level of income. The higher the rate of saving, the richer the country. The higher the rate of population growth, the poorer the country. This paper argues that the predictions of the Solow model are, to a first approximation, consistent with the evidence. Examining recently available data for a large set of countries, we find that saving and population growth affect income in the directions that Solow predicted. Moreover, more than half of the cross-country variation in income per capita can be explained by these two variables alone. Yet all is not right for the Solow model. Although the model correctly predicts the directions of the effects of saving and

/pdf/a-contribution-to-the-empirics-of-economic-growth-27cl5gkqam.pdf

A Contribution to the Empirics of Economic Growth

Growth in this model is driven by technological change that arises from intentional investment decisions made by profit-maximizing agents. The distinguishing feature of the technology as an input is that it is neither a conventional good nor a public good; it is a nonrival, partially excludable good. Because of the nonconvexity introduced by a nonrival good, price-taking competition cannot be supported. Instead, the equilibrium is one with monopolistic competition. The main conclusions are that the stock of human capital determines the rate of growth, that too little human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth.

/pdf/endogenous-technological-change-4yzdlw043b.pdf

Endogenous Technological Change

Existing strategies for econometric analysis related to macroeconomics are subject to a number of serious objections, some recently formulated, some old. These objections are summarized in this paper, and it is argued that taken together they make it unlikely that macroeconomic models are in fact over identified, as the existing statistical theory usually assumes. The implications of this conclusion are explored, and an example of econometric work in a non-standard style, taking account of the objections to the standard style, is presented. THE STUDY OF THE BUSINESS cycle, fluctuations in aggregate measures of economic activity and prices over periods from one to ten years or so, constitutes or motivates a large part of what we call macroeconomics. Most economists would agree that there are many macroeconomic variables whose cyclical fluctuations are of interest, and would agree further that fluctuations in these series are interrelated. It would seem to follow almost tautologically that statistical models involving large numbers of macroeconomic variables ought to be the arena within which macroeconomic theories confront reality and thereby each other. Instead, though large-scale statistical macroeconomic models exist and are by some criteria successful, a deep vein of skepticism about the value of these models runs through that part of the economics profession not actively engaged in constructing or using them. It is still rare for empirical research in macroeconomics to be planned and executed within the framework of one of the large models. In this lecture I intend to discuss some aspects of this situation, attempting both to offer some explanations and to suggest some means for improvement. I will argue that the style in which their builders construct claims for a connection between these models and reality-the style in which "identification" is achieved for these models-is inappropriate, to the point at which claims for identification in these models cannot be taken seriously. This is a venerable assertion; and there are some good old reasons for believing it;2 but there are also some reasons which have been more recently put forth. After developing the conclusion that the identification claimed for existing large-scale models is incredible, I will discuss what ought to be done in consequence. The line of argument is: large-scale models do perform useful forecasting and policy-analysis functions despite their incredible identification; the restrictions imposed in the usual style of identification are neither essential to constructing a model which can perform these functions nor innocuous; an alternative style of identification is available and practical. Finally we will look at some empirical work based on an alternative style of macroeconometrics. A six-variable dynamic system is estimated without using 1 Research for this paper was supported by NSF Grant Soc-76-02482. Lars Hansen executed the computations. The paper has benefited from comments by many people, especially Thomas J. Sargent

/pdf/macroeconomics-and-reality-3v6kkpl8jz.pdf

Macroeconomics and reality

Growth in this model is driven by technological change that arises from intentional investment decisions made by profit maximizing agents. The distinguishing feature of the technology as an input is that it is neither a conventional good nor a public good; it is a nonrival, partially excludable good. Because of the nonconvexity introduced by a nonrival good, price-taking competition cannot be supported, and instead, the equilibriumis one with monopolistic competition. The main conclusions are that the stock of human capital determines the rate of growth, that too little human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth.

https://papers.ssrn.com/sol3/Delivery.cfm/nber_w3210.pdf?abstractid=226703&mirid=1

Does fiscal policy still matter?. A reply

ECONOMISTS HAVE ATTEMPTED TO ESTIMATE potential gross national product for over a decade now. Potential GNP measures the output the economy would produce if it were operating at some fixed, fairly low level of unemployment, usually defined by an aggregate unemployment rate of about 4 percent. The difference between potential and actual GNP at any point in time is known as the GNP gap. In 1962, Arthur Okun published an analysis that has been the benchmark for official measures of potential GNP ever since, and in the process enunciated what came to be known as Okun's law, which relates the unemployment rate to the percentage GNP gap.' Potential GNP and Okun's law became two of the handiest tools of analysis and presentation for economic stabilization problems. Particularly during the first half of the 1960s, when GNP was running below potential and policy was devoted to closing the gap, no sophisticated analysis of the economy failed to identify the loss in real output that was associated with an economy falling short of full employment. The careful estimation of the full employment surplus in the federal budget has been an important by-product of the estimation of potential

/pdf/labor-force-structure-potential-output-and-productivity-4y0ovzj630.pdf

Labor Force Structure, Potential Output, and Productivity

Capital, Labor, and Income in Manufacturing

The paper surveys the neoclassical theory of growth. As a preliminary, the meaning of the adjective "neoclassical" is discussed. The basic model is then sketched, and the conditions ensuring a stationary state are illustrated. The issue of the convergence to a stationary state (and that of the speed of convergence) is further considered. A discussion of "primary factors" opens the way to the "new" theory of growth, with endogenous technical progress. A number of extensions of the basic model are then recalled: two-sector and multi-sectoral models, overlapping generations models, the role of money in growth models. JEL Codes: O41, E25 Keywords: Distribution, Growth, Income Distribution, Income

The neoclassical theory of growth and distribution

It is easy to choose a subject for a distinguished lecture like this, before a large and critical audience with a wide range of interests. You need a topic that is absolutely contemporary, but somehow perennial. It should survey a broad field, without being superficial or vague. It should probably bear some relation to economic policy, but of course it must have some serious analytical foundations. It is nice if the topic has an important literature in the past of our subject – a literature which you can summarize brilliantly in about eleven minutes – but it better be something in which economists are interested today, and it should appropriately be a subject you have worked on yourself. The lecture should have some technical interest, because you can’t waffle for a whole hour to a room full of professionals, but it is hardly the occasion to use a blackboard.

Robert M. Solow

Papers

Does fiscal policy still matter?. A reply

Labor Force Structure, Potential Output, and Productivity

Capital, Labor, and Income in Manufacturing

The neoclassical theory of growth and distribution

The Economics of Resources or the Resources of Economics