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A defense of AK growth models

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  • Ellen R. McGrattan

Abstract

AK growth models predict that permanent changes in government policies affecting investment rates should lead to permanent changes in a country?s GDP growth. Charles Jones (1995) sees no evidence for this prediction in data for 15 OECD countries after World War II: rates of investment, especially for equipment, have risen while GDP growth rates have not. This article provides evidence supporting the AK models? prediction. Data back to the 19th century show a strong positive relationship between investment rates and growth rates and short-lived deviations from trends. A strong positive relationship also exists between average rates of investment and growth in postwar data for a large cross-section of countries. To account for the short-run deviations in rates that Jones highlights, the model he used is extended to allow policies to affect not only investment/output ratios but also capital/output ratios and labor/leisure decisions.

Suggested Citation

  • Ellen R. McGrattan, 1998. "A defense of AK growth models," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 22(Fall), pages 13-27.
  • Handle: RePEc:fip:fedmqr:y:1998:i:fall:p:13-27:n:v.22no.4
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    1. Stokey, Nancy L & Rebelo, Sergio, 1995. "Growth Effects of Flat-Rate Taxes," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 519-550, June.
    2. McGrattan, Ellen R. & Schmitz, James Jr., 1999. "Explaining cross-country income differences," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 10, pages 669-737, Elsevier.
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