Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
growth rate when it is funded with an income tax or wage income taxes while a
temporary rise increases output but has no impact on long-run growth rate. It also claims
that government spending may increase growth rates only if it is financed with a taxsmoothing policy.
Karras (1999) and Tomljanocich (2004) have tested empirically whether tax policies have
transitory or permanent impact on the growth rate of output. However, all these studies
deal with only developed economies and almost no work on developing ones.
Therefore, this gap in existing literature on Fiscal policies and economic growth needs to
be filled. A salient feature of models featuring a credit multiplier is that agency costs are
more severe in recessions than in booms, precisely because agency costs are inversely
related to firms' net worth, which is procyclical.
While in recessions a firm's ability to finance productive investment is constrained by its
balance sheet, financial frictions are mitigated in booms as higher net worth relaxes
incentive constraints, reducing the conflict of interest with outside investors.
The credit multiplier is more forceful the deeper the recession, but tends to disappear in a
boom as improved financial conditions mitigate the agency cost of investment finance. In
the absence of exogenous shocks that impair balance sheets, these models are therefore
unable to explain why periods of expansion may sow the seeds for future recessions.
A critical difference between the Harrod-Domar model i.e. endogeneous growth model
and the neoclassical growth model lies in the effect the savings rate has on growth rates.
In the Harrod-Domar model an increase in the savings rate increases the growth rate.
However, in the neo classical model, an increase in the savings rate increases the per
capita income but it does not result in a permanent (as compared to a temporary) increase
in the growth rate.
While Solow's neo-classical model explains the first five out of the six stylized facts quite
well, it cannot explain the fact that growth rates differ between countries for long periods
of time. This model would suggest convergence in growth rates, something that does not
seem to take place.
To explain this problem, theorists have focused their attention on technical progress and
have made attempts to make the growth rate endogenous. Various endogenous growth
theory models, proposed by economists like Robert Lucas and Paul Romer, have
constructed a dynamic model where the rate of growth of output depends on aggregate
stock of capital (both physical and human) and on the level of research and development
in an economy.
Many of the models are mathematically complex but do explain the persistent difference
in growth rates between countries and the importance of research and human capital
development in permanently increasing the growth rate of an economy.
A Beginners Guide to Endogenous Growth Theory
Filed in Economic Basics by Vanessa Cheung on November 9, 2013 0 Comments
Table of Contents [hide]
1 1 What is endogenous growth theory?
2 2 What are the factors affecting economic growth?
3 3 Share:
What is endogenous growth theory?
The endogenous growth theory was developed by economists, including Paul Romer and
Robert Lucas, in the mid-1980s. The theory came about because economists had become
increasingly dissatisfied with neo-classical growth models that did not explain where the
technological changes in economies came from.
Endogenous growth theory states that economic growth is generated internally and not by
external forces as the neo-classical model suggests. The endogenous growth theory
argues that technological change is a response to economic incentives in the market that
can be influenced by the government or private sector.
What are the factors affecting economic growth?
Endogenous growth theory states that investment in human capital, innovation and
knowledge are significant contributors to economic growth, because they help to develop
new technology and make production become more efficient.
Lets take a look at the two key factors of growth mentioned in this theory:
Human Capital
Investment in human capital can be in the form of education and training. Through
education and training, the workers will become more productive and economic growth
will increase. Endogenous growth theory also states that there will be spillover benefits
from investing in human capital.
Innovation and Knowledge
The theory emphasises that private investment in research and development (R&D) is a
key factor to technological change. Innovation will lead to better goods and better
production processes, which again increases productivity and drives economic growth.
What are the implications of this model?
Endogenous growth theorists stress the need for the government and private sector to
provide incentives for individuals to be innovative. The following government policies
can help to encourage innovation, and increase economic growth in the long run.
4
5 Protecting intellectual property using property rights such as patents, copyrights and
trademarks
The theory also suggests that poor countries with little human capital cannot become rich
by simply by adding more physical capital. Investment in human capital through
education and training is crucial to achieving growth.