Can the Composition of Capital Constrain Potential Output? A Gap Approach
AbstractFocusing on core-infrastructure capital vis-�-vis productive capital, we propose a macroeconomic method to determine both which type of capital shortage would be constraining potential output and what would be the optimal composition, or optimal ratio between these two types, of capital in any given period. This method is based on an adapted two-gap model, estimated via linear programming, and illustrated with the cases of Chile and Mexico over the 1950-2000 period. The results show that there appears to be an oscillating pattern over this period, with either type of capital shortage alternating each other. The results also show that, optimally, core infrastructure appears to support a variable level of productive investment over time. However, the shortage of productive capital would at least be as important as that of infrastructure capital, suggesting an optimal trade off between the two. That is, the social opportunity cost of investing in either type of capital would be determined by the gap between the optimal growth rates estimated from these two types of capital. For either type of capital, a macroeconomic shortage would mean that the economy as a whole is in a net state of shortage.
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Bibliographic InfoPaper provided by Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 510.
Date of creation: Feb 2004
Date of revision:
Capital shortage; Potential output; Two-gap model; Linear programming;
Find related papers by JEL classification:
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
- O54 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
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