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Economic Growth in an Interdependent World Economy

  • Roger E. A. Farmer
  • Amartya Lahiri

The open-economy Solow-Swan growth model predicts (1) that growth should be uncorrelated with the ratio of national investment to GDP and (2) instantaneous convergence of GDP per capita across countries. In the presence of capital market imperfections convergence is predicted to occur more slowly. But savings and investment ratios should still differ substantially across countries. In the data, investment ratios are strongly correlated with growth across countries and investment ratios are closely correlated with savings ratios within countries. We argue that a two-sector two-country AK model provides a better description of the data than the Solow-Swan model. Copyright 2006 The Author(s). Journal compilation Royal Economic Society 2006.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 116 (2006)
Issue (Month): 514 (October)
Pages: 969-990

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Handle: RePEc:ecj:econjl:v:116:y:2006:i:514:p:969-990
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