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A Subtle and not Always Understood Link over 50 Years: A Note on Investment Rate and Economic Growth

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  • Sebastián Katz

    ()
    (Central Bank of Argentina)

  • Luis Lanteri

    ()
    (Central Bank of Argentina)

  • Sebastián Vargas

    (Central Bank of Argentina)

Abstract

Devoting an increasing amount of resources to the investment process tends to be a common recommendation to promote a sustained economic growth. Curiously enough, according to growth neoclassical theory, the factor that determines growth in the long-term is technological progress rather than accumulation of physical capital. Proposing, on the contrary, that this accumulation plays a relevant role in long-term growth implies assuming that investment can generate increases in aggregate productivity, through externalities or other types of increasing returns related to such process, as it is stated by the new growth theory. However, these do not seem to be the elements being considered when stating that “investment is the key for growth” (as it is commonly expressed in economic policy debates). In this sense, it is not the purpose of this paper to reject this linkage. In fact, this article states that in the case of our economies, higher levels of investment and domestic saving can play a significant role in the consolidation of growth processes due to their contribution to macroeconomic sustainability. On the other hand, this note aims at recalling that, even though not necessarily applicable to the domestic economy (as it is quantitatively illustrated), there are potential situations of “dynamic inefficiency” that may be far from optimum from an inter-generational point of view.

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Bibliographic Info

Article provided by Central Bank of Argentina, Economic Research Department in its journal Ensayos Económicos.

Volume (Year): 1 (2007)
Issue (Month): 47 (April - June)
Pages: 7-62

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Handle: RePEc:bcr:ensayo:v:1:y:2007:i:47:p:7-62

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Keywords: domestic saving; economic growth; investment; productivity;

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  1. Young, Alwyn, 1994. "Lessons from the East Asian NICS: A contrarian view," European Economic Review, Elsevier, vol. 38(3-4), pages 964-973, April.
  2. Robert G. King & Sergio T. Rebelo, 1995. "Transitional Dynamics and Economic Growth in the Neoclassical Model," NBER Working Papers 3185, National Bureau of Economic Research, Inc.
  3. Paul M. Romer, 1987. "Crazy Explanations for the Productivity Slowdown," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 163-210 National Bureau of Economic Research, Inc.
  4. Rómulo A. Chumacero & J. Rodrigo Fuentes, 2002. "On the determinants of the Chilean Economic Growth," Working Papers Central Bank of Chile 134, Central Bank of Chile.
  5. Mankiw, N Gregory & Romer, David & Weil, David N, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 407-37, May.
  6. J. Bradford De Long & Lawrence H. Summers, . "Equipment Investment and Economic Growth," J. Bradford De Long's Working Papers _122, University of California at Berkeley, Economics Department.
  7. Jeremy Greenwood & Boyan Jovanovic, 1998. "Accounting for Growth," NBER Working Papers 6647, National Bureau of Economic Research, Inc.
    • Jeremy Greenwood & Boyan Jovanovic, 2001. "Accounting for Growth," NBER Chapters, in: New Developments in Productivity Analysis, pages 179-224 National Bureau of Economic Research, Inc.
  8. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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