Working Paper: CEPR ID: DP3250
Authors: Roger E. A Farmer; Amartya Lahiri
Abstract: We outline six facts that should be explained by an international growth model: 1) Conditional convergence; 2) cross-country dispersion of growth rates; 3) cross-country dispersion of per capita income levels; 4) cross-country dispersion of savings rates; 5) within country correlation of savings and investment and 6) cross-country equality of real rates of interest. We argue that the neoclassical model performs poorly in several dimensions and we provide an alternative two-sector endogenous growth model based on the work of Lucas and Romer that can account for all of our stylized facts. Our model accounts for the observation that poor countries grow faster than rich ones (fact number 1) as a consequence of the transitional dynamics of the ratio of physical to human capital. We show that opening capital mobility across countries does not necessarily equate the physical to human capital ratios across countries despite the resultant equalization of factor prices.
Keywords: Endogenous Growth; Interdependent World Economy
JEL Codes: F43; O16; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| poorer countries grow faster than richer countries (O57) | conditional convergence (C62) |
| neoclassical model fails to account for observed disparities in growth rates (O41) | disparities in growth rates and per capita incomes across countries (O57) |
| two-sector endogenous growth model can explain disparities in growth rates and per capita incomes (O41) | disparities in growth rates and per capita incomes across countries (O57) |
| capital mobility does not equalize physical to human capital ratios (F29) | physical to human capital ratios across countries (J24) |
| different rates of time preference across countries (D15) | varying long-run savings and investment rates (E21) |