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Stochastic Growth Models and Their Econometric Implications

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  • Binder, Michael
  • Pesaran, M Hashem

Abstract

This article considers the consequences of explicitly allowing for stochastic technological progress and stochastic labor input in the discrete-time Solow-Swan and AK growth models. It shows that the capital-output ratio, but not output per capita, is ergodic irrespective of whether there is a unit root in technology, and thus is the more appropriate measure to use in the cross-sectional analysis of the growth process. Furthermore, the article derives the cross-sectional and time-series implications of the stochastic Solow-Swan model and contrasts these to those of its deterministic counterpart. Among these implications are that the mean of the capital-output ratio depends in a precise way not only on the saving rate and the growth rate of labor input, but also on the variance and higher-order cumulants of the capital-output ratio. Using the Summers-Heston data for seventy-two countries from 1960 to 1992, strong support is found for the predictions of the stochastic Solow-Swan model as compared to those of its deterministic counterpart (as well as those of the AK model), including a significant negative cross-sectional relationship between the mean and the variance of the capital-output ratio. Copyright 1999 by Kluwer Academic Publishers

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Bibliographic Info

Article provided by Springer in its journal Journal of Economic Growth.

Volume (Year): 4 (1999)
Issue (Month): 2 (June)
Pages: 139-83

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Handle: RePEc:kap:jecgro:v:4:y:1999:i:2:p:139-83

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Web page: http://www.springerlink.com/link.asp?id=102931

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