Empirical applications of the Solow Model
Pubali Chakraborty
Ashoka University
Pubali Chakraborty (Ashoka University)
Empirical applications of the Solow Model
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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
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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
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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
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Solow residual
Growth accounting across countries
1
A = B 1−α
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Convergence
Convergence
backward countries would tend to grow faster than rich countries, catchup
phenomenon is called convergence
narrowing of gaps between countries
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Convergence
inverse relationship between growth rate and per capita GDP
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Convergence
For OECD countries between 1960-2008, convergence in growth rates
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Convergence
absence of convergence between 1960-2008 when the world is considered
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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
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Convergence
Conditional convergence
conditional convergence: deviation from own steady state is relevant
policy changes/ shocks can throw countries out of their steady states
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Inequality
Evolution of income distribution
evidence of overall increase in inequality
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Inequality
Twin peaks income distribution
absolute poverty has been decreasing over time
poorest countries have become relatively poorer
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