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Growth with perfect capital movements in CES: US Debt Dynamics and model estimation

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Ziesemer,Thomas (MERIT)

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Abstract

We derive the central differential equation of the neoclassical growth model for the case of a CES (constant elasticity of substitution) production function with perfect capital movement in terms of the debt/GDP ratio and estimate it in several ways for the United States and in a later step the whole model. Debt data are derived from the accumulation of differences between investment and we show that then valuation effects play a minor role. The result is that the US debt/GDP ratio follows the pattern of a stable differential equation, which will lead to a long-run debtor position. The debt/GDP ratio will approach a value between 50% and 60% (depending on the specification used) unless a structural break increases the world interest rates or, similarly, US spreads reduce the US demand for foreign debt. A value of 50% will be achieved around 2040. We also find short-run deviations from this long-run path, which are characterized by non-sustainable explosive debt growth. These phases are characterized by high interest rates and followed by devaluations of the dollar. Our simple method allows detecting such phases early on. The estimation of the whole model yields an elasticity of substitution for capital and labour of .155 with autocorrelation correction (and 1/3 without), a growth rate of labour-augmenting technical change of 1.65% (1.5%) and a corresponding initial level of labour productivity as of 1959 of about 350 (320).

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Paper provided by Maastricht : MERIT, Maastricht Economic Research Institute on Innovation and Technology in its series Research Memoranda with number 012.

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Date of creation: 2005
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Handle: RePEc:dgr:umamer:2005012

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Keywords: international economics and trade ;

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  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. [Downloadable!] (restricted)
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  6. Cedric Tille, 2003. "The impact of exchange rate movements on U.S. foreign debt," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Jan. [Downloadable!]
  7. Cedric Tille, 2005. "Financial Integration and the Wealth Effect of Exchange Rate Fluctuations," 2005 Meeting Papers 282, Society for Economic Dynamics. [Downloadable!]
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  8. Hoffmann, Mathias, 2004. "International capital mobility in the long run and the short run: can we still learn from saving-investment data?," Journal of International Money and Finance, Elsevier, vol. 23(1), pages 113-131, February. [Downloadable!] (restricted)
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  11. Neher, Philip A, 1970. "International Capital Movements along Balanced Growth Paths," The Economic Record, The Economic Society of Australia, vol. 46(115), pages 393-401, September.
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