Can Traditional Theories of Structural Change Fit The Data?
Two traditional explanations for structural changes are sector-biased technological progress and non-homothetic preferences. This paper integrates both into an otherwise standard growth model and quantitatively evaluates them vis-a-vis time series. The exercise identifies a set of puzzles for standard theories: (i) the model cannot account for the steep decline in manufacturing and rise in services in the later data; (ii) the standard model requires implausibly low elasticity of substitution across goods to match the consumption and output data; and (iii) the behavior of consumption and output shares differs significantly from that of employment shares. We argue that models that incorporate home production, sector-specific factor distortions, and differences across sectors in the accumulation of human capital are promising avenues to amend the standard models. (JEL: O11, O14, O41) (c) 2009 by the European Economic Association.
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Volume (Year): 7 (2009)
Issue (Month): 2-3 (04-05)
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