Accounting for development through investment prices
AbstractCross-country income gaps are large in the data. Can observed investment prices account for these gaps? Our model adds an extensive margin to the neoclassical growth model by allowing for entry of firms. When combined with a “returns to variety” effect, our model provides an amplification mechanism from investment prices to output. Using cross-country data on relative investment prices, the model can explain up to 5 to 6-fold income differences between the richest and poorest countries in our sample while simultaneously reducing the implied cross-country TFP differences.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Monetary Economics.
Volume (Year): 59 (2012)
Issue (Month): 6 ()
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Web page: http://www.elsevier.com/locate/inca/505566
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