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Investment and Growth: Half a Century of a Subtle and Frequently Misunderstood Relationship

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  • Sebastián Katz

    ()
    (Central Bank of Argentina)

  • Luis Lanteri

    ()
    (Central Bank of Argentina)

  • Sebastián Vargas

    (Central Bank of Argentina)

Abstract

A usual policy recommendation to promote sustained economic growth it to dedicate increasing resources to the investment process (i.e. high investment rates). In contrast, a well known result of neoclassical growth theory is that the only determinant of long run growth is technological progress, not capital accumulation. On the contrary, to postulate that the investment rate has an important role to play in long run growth one needs to assume, as the new theory of growth does, that investment is capable of generating increases in aggregate productivity through externalities or some other form of increasing returns to scale. However, this qualifications are not the ones that are usually invoked when it is claimed that investment is the key ingredient for long run growth, as it is usually asserted in policy debates. It is not the purpose of this paper to deny the existence of the investment growth nexus. In fact, this paper argues that in the case of our economies, because of their important contribution on macroeconomic sustainability, high investment and domestic savings rates can play a crucial role in the consolidation of the growth process. Moreover, although it is not the case of Argentina (as we illustrate quantitatively), this paper also aims to recall that potential intergenerational sub optimal situations of dynamic inefficiency can arise if the investment rate exceeds its optimal level.

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File URL: http://www.bcra.gov.ar/pdfs/investigaciones/WP%202007%2022.pdf
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Bibliographic Info

Paper provided by Central Bank of Argentina, Economic Research Department in its series BCRA Working Paper Series with number 200722.

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Length: 34 pages
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:bcr:wpaper:200722

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Keywords: economic growth; investment rate; productivity; domestic savings;

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  1. Ricardo Bebczuk & Klaus Schmidt-Hebbel, 2007. "La paradoja de Feldstein-Horioka: una nueva visión a nivel de sectores institucionales," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(1), pages 49-82, enero-mar.
  2. 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.
  3. Gregory Mankiw, 1995. "The Growth of Nations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 275-326.
  4. Ricardo Bebczuk & Klaus Schmidt-Hebbel, 2006. "The Feldstein-Horioka Paradox: A New Perspective from the Institutional Sector Level," BCRA Working Paper Series 200603, Central Bank of Argentina, Economic Research Department.
  5. Barry P. Bosworth & Susan M. Collins, 2003. "The Empirics of Growth: An Update," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 113-206.
  6. Peter Klenow & Andrés Rodríguez-Clare, 1997. "The Neoclassical Revival in Growth Economics: Has It Gone Too Far?," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 73-114 National Bureau of Economic Research, Inc.
  7. 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.
  8. Douglas Gollin, 2001. "Getting Income Shares Right," Department of Economics Working Papers 2001-11, Department of Economics, Williams College.
  9. Howard Pack, 1994. "Endogenous Growth Theory: Intellectual Appeal and Empirical Shortcomings," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 55-72, Winter.
  10. Young, Alwyn, 1995. "The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 641-80, August.
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