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Learning About Growth

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  • Gina Pieters

    (University of Minnesota)

  • Andy Glover

    (University of Minnesota)

Abstract

We 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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File URL: http://www.economicdynamics.org/meetpapers/2010/paper_1059.pdf
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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 1059.

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Date of creation: 2010
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Handle: RePEc:red:sed010:1059

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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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  1. Emine Boz & Christian Daude & C. Bora Durdu, 2011. "Emerging Market Business Cycles Revisited: Learning about the Trend," Koç University-TUSIAD Economic Research Forum Working Papers 1110, Koc University-TUSIAD Economic Research Forum.
  2. Damiano Sandri, 2010. "Growth and Capital Flows with Risky Entrepreneurship," IMF Working Papers 10/37, International Monetary Fund.
  3. Chang-Tai Hsieh & Peter J. Klenow, 2007. "Relative Prices and Relative Prosperity," American Economic Review, American Economic Association, vol. 97(3), pages 562-585, June.
  4. Hausmann, Ricardo & Pritchett, Lant & Rodrik, Dani, 2004. "Growth Accelerations," Working Paper Series rwp04-030, Harvard University, John F. Kennedy School of Government.
  5. Fatih Guvenen, 2006. "Learning your earning: are labor income shocks really very persistent?," Discussion Paper / Institute for Empirical Macroeconomics 145, Federal Reserve Bank of Minneapolis.
  6. Francisco J. Buera & Yongseok Shin, 2009. "Productivity Growth and Capital Flows: The Dynamics of Reforms," NBER Working Papers 15268, National Bureau of Economic Research, Inc.
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