Learning About Growth
AbstractWe introduce a model in which a consumers must learn whether a country's growth rate shock is permanent or transitory. We show that for developing countries, TFP growth rates have been highly volatile, while for developed country the growth rate is comparatively stable. This difference is sufficient to explain the allocation puzzle under the assumption that the initial correlation between forecasted and realized growth rates is negative. In addition, we document that the allocation puzzle puzzle decreases over time - the ten year correlation between inflows and growth rates is more negative than the twenty year correlation - in agreement with our model predictions. We interpret this as evidence that the learning mechanism underlying our model is relevant to understanding the differences in behavior of developed and developing countries.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 1059.
Date of creation: 2010
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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