Working Paper: CEPR ID: DP965
Authors: Dan Bendavid; David H. Papell
Abstract: For decades, the prevailing sentiment among economists was that growth rates remain constant over the long run. Kaldor considered this to be one of the six important `stylized facts' that theory should address, and until the emergence of endogenous growth models, this was a fundamental feature of growth theory. This paper uses an endogenous trend break model to investigate the unit root hypothesis for 16 countries, using annual GDP data spanning up to 130 years. Rejection of the unit root, which is facilitated by the inclusion of a trend break, introduces the possibility of examining the long-run behaviour of growth rates. We find that most countries exhibited fairly steady growth for a period lasting several decades. The termination of this period was usually characterized by a significant and sudden drop in GDP levels. But rather than simply returning to their previous steady-state path, as predicted by the standard neoclassical growth model, most countries continued to grow at roughly double their pre-break rates for many decades, even after their original growth path had been surpassed.
Keywords: Economic growth; Unit root hypothesis
JEL Codes: C22; E1; 01; 05; 047
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| significant economic shocks, such as wars (N44) | breaks in the trend of GDP growth rates (E32) |
| breaks in the trend of GDP growth rates (E32) | subsequent increase in growth rates (O49) |
| magnitude of the decline in GDP levels (E20) | subsequent increase in post-transition growth rates (O49) |
| significant drops in GDP levels during major upheavals (F44) | sustained growth period at rates exceeding previous levels (O44) |