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Public Policy, Price Distortions, and Investment Rates

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Abstract

Differences in the relative price of investment over consumption goods across countries are big, even after excluding non-tradable consumption goods. We interpret these differences as arising from differences in a wide range of policies that increase the cost of investment. Under this interpretation, we measure investment distortions using Summers and Heston's data and show that this measure is negatively correlated with investment rates and income per worker in a cross section of countries. We show that the steady state relation between relative investment distortions and relative investment rates predicted by a standard growth model closely resembles what we observe in the data. Moreover, simulations of a calibrated version of the model in which distortions follow a stochastic process common to all countries account for around 90% of the final disparity in relative investment rates. The model, however, cannot account for the disparity in income across countries and its evolution over time.

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Bibliographic Info

Paper provided by University of Western Ontario, Department of Economics in its series UWO Department of Economics Working Papers with number 9901.

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Date of creation: Jan 1999
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Handle: RePEc:uwo:uwowop:9901

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Postal: Department of Economics, Reference Centre, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
Phone: 519-661-2111 Ext.85244
Web page: http://economics.uwo.ca/research/research_papers/department_working_papers.html

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References

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  1. Jones, Charles I., 1994. "Economic growth and the relative price of capital," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 359-382, December.
  2. Jones, Larry E & Manuelli, Rodolfo E, 1990. "A Convex Model of Equilibrium Growth: Theory and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1008-38, October.
  3. King, R.G. & Rebelo, S., 1988. "Public Policy And Economic Growth: Developing Neoclassical Implications," RCER Working Papers 225, University of Rochester - Center for Economic Research (RCER).
  4. De Long, J. Bradford & Summers, Lawrence H., 1993. "How strongly do developing economies benefit from equipment investment?," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 395-415, December.
  5. N. Gregory Mankiw & David Romer & David N. Weil, 1992. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
  6. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1996. "The Poverty of Nations: A Quantitative Exploration," NBER Working Papers 5414, National Bureau of Economic Research, Inc.
  7. Thomas J. Holmes & James A. Schmitz, Jr., 1994. "Resistance to technology and trade between areas," Staff Report 184, Federal Reserve Bank of Minneapolis.
  8. Diego Restuccia, 1998. "Technology Adoption and Schooling: Amplifier Income Effects of Policies Across Countries," UWO Department of Economics Working Papers 9810, University of Western Ontario, Department of Economics.
  9. McGrattan, Ellen R., 1996. "Solving the stochastic growth model with a finite element method," Journal of Economic Dynamics and Control, Elsevier, vol. 20(1-3), pages 19-42.
  10. Parente, Stephen L & Prescott, Edward C, 1994. "Barriers to Technology Adoption and Development," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 298-321, April.
  11. Michael Sarel, 1995. "Relative Prices, Economic Growth and Tax Policy," IMF Working Papers 95/113, International Monetary Fund.
  12. Stephen L. Parente & Richard Rogerson & Randall Wright, 2000. "Homework in Development Economics: Household Production and the Wealth of Nations," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 680-687, August.
  13. Stephen L. Parente & Edward C. Prescott, 1993. "Changes in the wealth of nations," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-16.
  14. O'Neill, Donal, 1995. "Education and Income Growth: Implications for Cross-Country Inequality," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1289-1301, December.
  15. Thomas J. Holmes & James A. Schmitz, Jr., 1995. "Resistance to new technology and trade between areas," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-17.
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Cited by:
  1. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1996. "The Poverty of Nations: A Quantitative Exploration," NBER Working Papers 5414, National Bureau of Economic Research, Inc.
  2. Edward C. Prescott, 1997. "Needed: a theory of total factor productivity," Staff Report 242, Federal Reserve Bank of Minneapolis.
  3. Stephen L. Parente & Richard Rogerson & Randall Wright, 1999. "Household production and development," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 21-35.

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