Working Paper: CEPR ID: DP780
Authors: Daniel Cohen
Abstract: The two notes deal (from different angles) with the extension of the Solow model that has been offered by Mankiw, Romer and Weil (MRW). In this `extended Solow' model, physical capital enters the production function with the same weight as human capital and both weights are about 1/3. The first note challenges the assumption that the law of motion of human capital is collinear with the law of motion of physical capital, a key assumption which allows MRW to keep a one-dimensional trade of economic growth. The note shows instead that growth appears to be the sum of two terms: the traditional Solow term (proportional to the distance between the initial and `terminal' value of per-capita income); and the `productivity wedge', which is shown to be involved and to depend on the human-to-physical capital ratio. The second note verifies that physical capital enters into the production function with a weight of (only) 1/3 but challenges the view that school enrolment is a `causal' determinant of economic growth. In order to do that, the note estimates a growth equation in which an idiosyncratic term is controlled for each country.
Keywords: growth; Solow model; human capital; physical capital
JEL Codes: E22; O47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| law of motion of human capital (J24) | economic growth (O49) |
| law of motion of physical capital (E22) | economic growth (O49) |
| productivity wedge (O49) | economic growth (O49) |
| human capital (J24) | economic growth (O49) |
| physical capital (E22) | economic growth (O49) |
| school enrollment (I21) | economic growth (O49) |