Empirical applications of the Solow Model Pubali Chakraborty Ashoka University Pubali Chakraborty (Ashoka University) Empirical applications of the Solow Model 1 / 13 Overview Reference: Chapter 2 and 3, Jones and Vollrath Summarizing what we learnt from the Solow model so far: differences in investment rates, population growth rates can explain differences in per capita incomes economies exhibit sustained growth only in the presence of technological progress Pubali Chakraborty (Ashoka University) Empirical applications of the Solow Model 2 / 13 Solow residual Solow residual Suppose the production function is represented as: Y = BK α L1−α where B: total factor productivity or multifactor productivity term (residual) ẏ k̇ Ḃ =α + y k B growth rate of output per worker is decomposed into contribution of physical capital per worker contribution from multifactor productivity growth Pubali Chakraborty (Ashoka University) Empirical applications of the Solow Model 3 / 13 Solow residual Growth accounting over time from 1948-2010, one-half of U.S. growth was due to factor accumulation; one-half was due to improvements in the productivity of these factors productivity slowdown post 1973 (several explanations) role of IT has increased over the last few years Pubali Chakraborty (Ashoka University) Empirical applications of the Solow Model 4 / 13 Solow residual Growth accounting across countries 1 A = B 1−α Pubali Chakraborty (Ashoka University) Empirical applications of the Solow Model 5 / 13 Convergence Convergence backward countries would tend to grow faster than rich countries, catchup phenomenon is called convergence narrowing of gaps between countries Pubali Chakraborty (Ashoka University) Empirical applications of the Solow Model 6 / 13 Convergence inverse relationship between growth rate and per capita GDP Pubali Chakraborty (Ashoka University) Empirical applications of the Solow Model 7 / 13 Convergence For OECD countries between 1960-2008, convergence in growth rates Pubali Chakraborty (Ashoka University) Empirical applications of the Solow Model 8 / 13 Convergence absence of convergence between 1960-2008 when the world is considered Pubali Chakraborty (Ashoka University) Empirical applications of the Solow Model 9 / 13 Convergence growth rate of capital per effective worker: k̃˙ k̃ = s k̃ α−1 − (n + δ + g ) among countries that have the same steady state, the convergence hypothesis should hold: poor countries should grow faster on average than rich countries the further an economy is below its steady state, the faster the economy will grow, and vice versa Pubali Chakraborty (Ashoka University) Empirical applications of the Solow Model 10 / 13 Convergence Conditional convergence conditional convergence: deviation from own steady state is relevant policy changes/ shocks can throw countries out of their steady states Pubali Chakraborty (Ashoka University) Empirical applications of the Solow Model 11 / 13 Inequality Evolution of income distribution evidence of overall increase in inequality Pubali Chakraborty (Ashoka University) Empirical applications of the Solow Model 12 / 13 Inequality Twin peaks income distribution absolute poverty has been decreasing over time poorest countries have become relatively poorer Pubali Chakraborty (Ashoka University) Empirical applications of the Solow Model 13 / 13