Academic journal article Journal of Money, Credit & Banking

Is There Endogenous Long-Run Growth? Evidence from the United States and the United Kingdom

Academic journal article Journal of Money, Credit & Banking

Is There Endogenous Long-Run Growth? Evidence from the United States and the United Kingdom

Article excerpt

The key feature of endogenous growth models is that they imply that permanent

changes in government policy can have permanent effects on growth rates.

In this

paper we develop and implement an empirical framework to test this

implication. In a

regression of growth rates on current and lagged policy variables the sum

of the slope

coefficients for each policy variable should be nonzero (zero) for endogenous

(exogenous) growth models. In our estimation we use time series data

spanning up to 100

years for the United States and 160 years for the United Kingdom. We find

that the

implication for exogenous growth is usually rejected when both a tax

variable and a

public capital variable are included in the regression; failing to include

both variables

biases the results in favor of exogenous growth models. Our findings show

that it is

possible to have endogenous growth even when U.S. and U.K. GDP growth rates

appear to be stable over time. We conclude that at the aggregate level,

the production

function appears to exhibit constant returns to scale in reproducible inputs.

I do not see how one can look at figures like these without seeing them as representing possibilities. Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia's or Egypt's? If so, what, exactly? If not, what is it about the "nature of India" that makes it so? The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else. Robert E. Lucas, Jr. (1988, p. 5)

The growth experiences of many "older" and "newer" Newly Industrializing Countries (Hong Kong, Singapore, South Korea, Taiwan, China, Indonesia, Malaysia, Thailand) have been called miracles. Countries that had little or no per capita growth for long periods of time suddenly became high growth performers for long periods of time. This evidence has led many economists to believe that government policy can have sustained effects on growth rates.

This belief is not embedded in the neoclassical or exogenous growth models of Ramsey, Solow, and Cass-Koopmans. While these models do predict that government policy changes can affect growth rates, they predict that there is no long-run effect of these policy changes. As the above epigram illustrates, Lucas (1988), Romer (1986, 1990), and many others developed the new "endogenous" growth models for one critical reason: to have an explicit paradigm in which government policy could have sustained effects on long-run growth rates.

In this paper, we seek to empirically distinguish between stochastic endogenous and exogenous growth models by using their differing implications for the long-run effects of government policy changes on growth rates. We begin by considering a simple class of stochastic growth models. In this class, growth is endogenous (exogenous) if the production function exhibits constant (decreasing) returns in the reproducible inputs. We derive the reduced form expressing growth rates as a function of lagged policy variables. We show that if growth is exogenous, then the sum of the coefficients on the variables is zero, while if growth is endogenous, the sum of the coefficients is nonzero.

This restriction has a simple empirical counterpart: In a regression of growth rates on current and lagged policy variables, the coefficients should sum to zero (nonzero) if growth is exogenous (endogenous). We test this implication of exogenous growth models using time series data from the United States and the United Kingdom.(1) Our data set includes measures of public capital and tax rates; most of these measures extend back a hundred years for the United States and 160 years for the United Kingdom. …

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