Working Paper: CEPR ID: DP10846
Authors: Diego Comin; Danial Lashkari; Mart Mestieri
Abstract: We present a new multi-sector growth model that accommodates long-run demand and supply drivers of structural change. The model generates nonhomothetic Engel curves at all levels of development and is consistent with the decline in agriculture, the hump-shaped evolution of manufacturing and the rise of services over time. The economy converges to a constant aggregate growth rate that depends on sectoral income elasticities, capital intensities and rates of technological progress. We estimate the demand system derived from the model using historical data on sectoral employment shares from twenty-five countries and household survey data from the US. Our estimated model parsimoniously accounts for the broad patterns of sectoral reallocation observed among rich, miracle and developing economies in the post-war period. We find that income effects play a major role in generating structural change.
Keywords: implicitly additively separable preferences; nonhomothetic CES preferences; structural transformation
JEL Codes: E2; O1; O4; O5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Income effects (H31) | Structural change (L16) |
| Increasing income (E25) | Higher demand for goods with greater income elasticities (D12) |
| Higher demand for goods with greater income elasticities (D12) | Shift in employment patterns (J29) |
| Structural change (L16) | Reallocation of resources from agriculture to manufacturing and services (O14) |
| Model predictions (C59) | Evolution of sectoral employment shares (J29) |
| Model can generate humpshaped patterns (C59) | Manufacturing consumption shares (E20) |