The two sector endogenous growth model: an atlas

In this paper we investigate the underlying structure of the Lucas (1988) endogenous growth model. We derive analytically, the restrictions on the parameter space that are necessary and sufficient for the existence of balanced growth paths and saddle-path stable local dynamics. We demonstrate that in contrast to the original model, with the addition of an external effect and depreciation in the human capital sector, the Lucas model can be made consistent with the high degrees of intertemporal elasticities of substitution increasingly estimated in the empirical literature even if there is a significant degree of increasing returns to scale in the physical production sector of the economy. Finally we demonstrate that for a given baseline rate of steady state growth, with the inclusion of modest degrees of depreciation and external effects to the human capital production process, the model can accommodate the widest possible range of economies including those characterized by low discount factors, high elasticities of intertemporal substitution, increasing returns in the final goods sector, and also both the high rates of population growth and steady state per-capita output growth we observe in many parts of the world today

Capital-Skill Complementarity and the Immigration Surplus

Immigration, Capital-Skill Complementarity, Overlapping Dynasties

Evaluating Historical Episodes using Shock Decompositions in the DSGE Model

We present alternative methods for calculating and interpreting the influence of exogenous shocks on historical episodes within the context of DSGE models. We show analytically why different methods for calculating shock decompositions can generate conflicting interpretations of the same historical episodes. We illustrate this point using an extended version of Drautzburg and Uhlig's (2015) model of the U.S. economy, focusing on the periods 1964-1966, 1979-1987, 2007-2008 and 2016-2018. We argue that the best method for analyzing particular episodes is one which isolates the influence of the shocks during the period under consideration and where the initial conditions represent the system's distance from steady state at the beginning of the episode

The two sector endogenous growth model: An atlas

In this paper we investigate the underlying structure of the . Lucas (1988) endogenous growth model. We derive analytically, the restrictions on the parameter space that are necessary and sufficient for the existence of balanced growth paths and saddle-path stable local dynamics. We demonstrate that in contrast to the original model, with the addition of an external effect and depreciation in the human capital sector, the Lucas model can be made consistent with the high degrees of intertemporal elasticities of substitution increasingly estimated in the empirical literature-even if there is a significant degree of increasing returns to scale in the physical production sector of the economy. Finally we demonstrate that for a given baseline rate of steady state growth, with the inclusion of modest degrees of depreciation and external effects to the human capital production process, the model can accommodate the widest possible range of economies-including those characterized by low discount factors, high elasticities of intertemporal substitution, increasing returns in the final goods sector, and also both the high rates of population growth and steady state per-capita output growth we observe in many parts of the world today. © 2012 Elsevier Inc

Ancient Greece is where Western civilisation began, and modern Greece is where it ends

Is the Greek debt crisis simply an isolated case or could similar debt problems develop in other countries across Europe and the rest of the world? Michael Ben-Gad writes that while it is easy to find examples of mismanagement and clientelistic behaviour in Greek society, it would be dangerous to regard the crisis as unique to Greece. He argues that with rapid aging and an unwillingness to adjust levels of spending to match new demographic realities, there is the clear potential for debt crises to emerge in other Western societies in the coming decades

The Optimal Taxation of Asset Income when Government Consumption is Endogenous: Theory, Estimation and Welfare

This paper derives the Ramsey optimal policy for taxing asset income in a model where government expenditure is a function of net output or the inputs that produce it. Extending Judd (1999), I demonstrate that the canonical result that the optimal tax on capital income is zero in the medium to long term is a special case of a more general model. Employing a vector error correction model to estimate the relationship between government consumption and net output for the United States between 1947Q1 to 2013Q2, I demonstrate that this special case is empirically implausible, and show how the cointegrating vector can be used to determine the optimal tax schedule. I simulate a version of the model using the empirical estimates to measure the welfare implications of changing the tax rate on asset income, and contrast these results with those generated in a version of the model where government consumption is purely exogenous. The shifting pattern of welfare measurements confirms the theoretical results. I calculate that the prevailing effective tax rate on net asset income in the US between 1995 and 2011 averaged 0.441. Hence abolishing the tax completely does generate welfare improvements, though only by the equivalent of less than a one percent permanent increase in consumption---less than a third the implied welfare benefit when the endogeneity of the government consumption is ignored. The maximum welfare improvement from shifting part of the burden of tax from capital to labour is the equivalent of a permanent increase in consumption of between only 1.173 and 1.304% and is attained when the tax rate on asset income is lowered to between 0.18 and 0.2. Allowing the tax rate to vary over time raises the maximum welfare benefit to 1.31%. All the results are very robust to a wide range of elasticities of labour supply