Working Paper: CEPR ID: DP1397
Authors: Richard E. Baldwin; Rikard Forslid
Abstract: This paper has two purposes. It introduces a direct approach to policy analysis in endogenous growth models - the q-theory approach - and uses this to illustrate several new openness-and-growth links that appear when we enrich the economic content of the early trade and growth models. The approach - inspired by Tobin's q - is merely a change of state variables and re-interpretation of steady-state conditions. The main difference is its focus on investment, which is after all, the heart of growth models. The approach's simplicity permits us to complicate the early models in interesting directions and to explicitly include trade barriers. The latter allows study of incremental policy reform rather than mere shifts from autarky to free trade (or small deviations from free trade) as in the early literature.
Keywords: endogenous growth; trade liberalization; Tobin's q
JEL Codes: F10; F12; F15; O40; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade barriers (F14) | lower Tobin's q (R42) |
| lower Tobin's q (R42) | reduced growth rates (O49) |
| trade liberalization (F13) | lower replacement cost of capital (G31) |
| lower replacement cost of capital (G31) | increase Tobin's q (H87) |
| increase Tobin's q (H87) | stimulate growth (O42) |
| localized spillovers in capital goods sector (E22) | lower capital's replacement cost (G31) |
| lower capital's replacement cost (G31) | enhance growth (O40) |
| trade policies altering factor supplies (F16) | raise capital's income stream (D33) |
| raise capital's income stream (D33) | raise Tobin's q (H87) |
| tariff revenues (H20) | influence expenditure levels (H59) |
| influence expenditure levels (H59) | affect Tobin's q (F29) |
| reciprocal liberalization of financial services (F30) | reduce markup between savers and investors (G19) |
| reduce markup between savers and investors (G19) | increase Tobin's q (H87) |
| increase Tobin's q (H87) | increase growth (O42) |