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Investment and Growth: Half a Century of a Subtle and Frequently Misunderstood Relationship

Author

Listed:
  • Sebastián Katz

    () (Central Bank of Argentina)

  • Luis Lanteri

    () (Central Bank of Argentina)

  • Sebastián Vargas

    (Central Bank of Argentina)

Abstract

A usual policy recommendation to promote sustained economic growth it to dedicate increasing resources to the investment process (i.e. high investment rates). In contrast, a well known result of neoclassical growth theory is that the only determinant of long run growth is technological progress, not capital accumulation. On the contrary, to postulate that the investment rate has an important role to play in long run growth one needs to assume, as the new theory of growth does, that investment is capable of generating increases in aggregate productivity through externalities or some other form of increasing returns to scale. However, this qualifications are not the ones that are usually invoked when it is claimed that investment is the key ingredient for long run growth, as it is usually asserted in policy debates. It is not the purpose of this paper to deny the existence of the investment growth nexus. In fact, this paper argues that in the case of our economies, because of their important contribution on macroeconomic sustainability, high investment and domestic savings rates can play a crucial role in the consolidation of the growth process. Moreover, although it is not the case of Argentina (as we illustrate quantitatively), this paper also aims to recall that potential intergenerational sub optimal situations of dynamic inefficiency can arise if the investment rate exceeds its optimal level.

Suggested Citation

  • Sebastián Katz & Luis Lanteri & Sebastián Vargas, 2007. "Investment and Growth: Half a Century of a Subtle and Frequently Misunderstood Relationship," BCRA Working Paper Series 200722, Central Bank of Argentina, Economic Research Department.
  • Handle: RePEc:bcr:wpaper:200722
    as

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    File URL: http://www.bcra.gov.ar/pdfs/investigaciones/WP%202007%2022.pdf
    File Function: Spanish version (versión en Español)
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    References listed on IDEAS

    as
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    2. Ricardo Bebczuk & Klaus Schmidt-Hebbel, 2007. "La paradoja de Feldstein-Horioka: una nueva visión a nivel de sectores institucionales," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(1), pages 49-82, enero-mar.
    3. Ricardo Bebczuk & Klaus Schmidt-Hebbel, 2007. "The Feldstein-Horioka Paradox: A New Perspective from the Institutional Sector Level," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(46), pages 103-136, January -.
    4. Barry P. Bosworth & Susan M. Collins, 2003. "The Empirics of Growth: An Update," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 113-206.
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    8. Masao Ogaki & Jonathan D. Ostry & Carmen M. Reinhart, 1996. "Saving Behavior in Low- and Middle-Income Developing Countries: A Comparison," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 38-71, March.
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    More about this item

    Keywords

    economic growth; investment rate; productivity; domestic savings;

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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