Productivity Slowdown and Resurgence. The Role of Capital Obsolescence
In a recent work, Karl Whelan  argues that the hypothesis of balanced growth is firmly rejected by postwar u.s. data. There is some clear evidence that the ratio of real investment to real consumption has exhibited an upward trend since the late 1950s. In this case, the traditional one-sector model of economic growth provides a poor description of the long-run behavior of the u.s. economy. In this paper, I develop a simple two-sector model of economic growth in which the obsolescence of capital goods is endogenous. Numerical simulations of unbalanced growth paths suggest that the rapid decline in the relative price of equipment goods observed since the mid-1960s in the u.s. has shortened the average service-life of equipment, which, in turn, induced a long-lasting underestimation of the growth rate of Total Factor Productivity.
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- Feldstein, Martin S & Rothschild, Michael, 1974. "Towards an Economic Theory of Replacement Investment," Econometrica, Econometric Society, vol. 42(3), pages 393-423, May.