The empirical evidence reveals conditional convergence in the sense that economies grow faster per capita if they start further below their steady-state positions. For a homogeneous group of economies - like the U.S. states, regions of western European countries, and the GECD countries - the convergence is unconditional in that the poor economies grow faster than the rich ones. The neoclassical growth model for a closed economy fits these facts if capital is viewed broadly to encompass human investments, so that diminishing returns to capital set in slowly, and if differences in government policies or preferences about saving lead to heterogeneity in steady-state positions. Yet if the model is opened to allow for full capital mobility, then the predicted rates of convergence for capital and output are much higher than those observed empirically. We show that the open-economy model conforms with the evidence if an economy can use foreign debt to finance only a portion of its capital, even if 50% or more of the total. The problems in using human capital as collateral can explain the required imperfection in the credit market.
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Length: Date of creation: Apr 1995 Date of revision: Handle: RePEc:nbr:nberwo:4206
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Barro, Robert J & Sala-i-Martin, Xavier, 1992.
"Convergence,"
Journal of Political Economy,
University of Chicago Press, vol. 100(2), pages 223-51, April.
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Cabrales, Antonio, 2000.
"Stochastic Replicator Dynamics,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(2), pages 451-81, May.
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Daniel Cohen & Jeffrey Sachs, 1991.
"Growth and External Debt Under Risk of Debt Repudiation,"
NBER Chapters,
in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 437-472
National Bureau of Economic Research, Inc.
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