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Growth Outside The Stable Path: Lessons From The European Reconstruction

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  • Francisco Alvarez-Cuadrado

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Abstract

This paper exploits a natural experiment, the large destruction of capital in continental Europe during World War II, to characterize the transitional dynamics of an economy that begins with a capital stock below its steady state level. We use these regularities as a benchmark to discriminate among competing growth specifications. A model that combines non-separabilities in preferences with a technology that restricts the degree of substitutability between inputs outperforms the widely used AK and Cobb-Douglas specifications with time-separable preferences. Our results suggest that policy evaluations based in growth models that overlook non-separabilities in preferences or impose strong restrictions on the technological structure might be grossly misleading.

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Bibliographic Info

Paper provided by McGill University, Department of Economics in its series Departmental Working Papers with number 2006-02.

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Length: 32 pages
Date of creation: Aug 2006
Date of revision:
Handle: RePEc:mcl:mclwop:2006-02

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Cited by:
  1. Simon Gilchrist & John C. Williams, 2004. "Transition Dynamics in Vintage Capital Models: Explaining the Postwar Catch-Up of Germany and Japan," NBER Working Papers 10732, National Bureau of Economic Research, Inc.
  2. Francisco Alvarez-Cuadrado & Mihaela I. Pintea, 2008. "A Quantitative Exploration of the Golden Age of European Growth," Working Papers 0805, Florida International University, Department of Economics.
  3. Simone Valente, 2009. "International status seeking, trade, and growth leadership," Canadian Journal of Economics, Canadian Economics Association, vol. 42(2), pages 554-589, May.
  4. Andreas Schäfer & Simone Valente, 2007. "Habit Formation, Dynastic Altruism, and Population Dynamics," CER-ETH Economics working paper series 07/77, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.

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