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Economic Growth in an Interdependent World Economy

  • Farmer, Roger E A
  • Lahiri, Amartya

We outline six facts that should be explained by an international growth model: 1) Conditional convergence; 2) cross-country dispersion of growth rates; 3) cross-country dispersion of per capita income levels; 4) cross-country dispersion of savings rates; 5) within country correlation of savings and investment and 6) cross-country equality of real rates of interest. We argue that the neoclassical model performs poorly in several dimensions and we provide an alternative two-sector endogenous growth model based on the work of Lucas and Romer that can account for all of our stylized facts. Our model accounts for the observation that poor countries grow faster than rich ones (fact number 1) as a consequence of the transitional dynamics of the ratio of physical to human capital. We show that opening capital mobility across countries does not necessarily equate the physical to human capital ratios across countries despite the resultant equalization of factor prices.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3250.

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Date of creation: Mar 2002
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Handle: RePEc:cpr:ceprdp:3250
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  1. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  2. Farmer, Roger E A & Lahiri, Amartya, 2002. "A Two-Country Model of Endogenous Growth," CEPR Discussion Papers 3245, C.E.P.R. Discussion Papers.
  3. Bond, Eric W. & Wang, Ping & Yip, Chong K., 1993. "A general two sector model of endogenous growth with human and physical capital," Working Papers 9303, Federal Reserve Bank of Dallas.
  4. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  5. Charles I. Jones, 1995. "Time Series Tests of Endogenous Growth Models," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 495-525.
  6. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1997. "The poverty of nations: a quantitative exploration," Staff Report 204, Federal Reserve Bank of Minneapolis.
  7. Barro, Robert J. & Mankiw, N Gregory & Sala-i-Martin, Xavier, 1994. "Capital Mobility in Neoclassical Models of Growth," CEPR Discussion Papers 1019, C.E.P.R. Discussion Papers.
  8. Ellen R. McGrattan, 1998. "A defense of AK growth models," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 13-27.
  9. Bond, Eric W. & Wang, Ping & Yip, Chong K., 1996. "A General Two-Sector Model of Endogenous Growth with Human and Physical Capital: Balanced Growth and Transitional Dynamics," Journal of Economic Theory, Elsevier, vol. 68(1), pages 149-173, January.
  10. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 70(1), pages 65-94.
  11. Casey B. Mulligan & Xavier Sala-i-Martin, 1992. "Transitional Dynamics in Two-Sector Models of Endogenous Growth," NBER Working Papers 3986, National Bureau of Economic Research, Inc.
  12. King, R.G. & Rebelo, S.T., 1989. "Transitional Dynamics And Economic Growth In The Neoclassical Model," RCER Working Papers 206, University of Rochester - Center for Economic Research (RCER).
  13. Popper, Helen, 1993. "Long-term covered interest parity: evidence from currency swaps," Journal of International Money and Finance, Elsevier, vol. 12(4), pages 439-448, August.
  14. Sergio Rebelo, 1999. "Long Run Policy Analysis and Long Run Growth," Levine's Working Paper Archive 2114, David K. Levine.
  15. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
  16. Jaume Ventura, 1997. "Growth and Interdependence," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 57-84.
  17. Harberger, Arnold C, 1980. "Vignettes on the World Capital Market," American Economic Review, American Economic Association, vol. 70(2), pages 331-37, May.
  18. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  19. Paul Romer, 1989. "Endogenous Technological Change," NBER Working Papers 3210, National Bureau of Economic Research, Inc.
  20. Casey B. Mulligan & Xavier Sala-i-Martin, 1993. "Transitional Dynamics in Two-Sector Models of Endogenous Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 739-773.
  21. Bond, Eric W. & Wang, Ping & Yip, Chong K., 1993. "A general two-sector model of endogenous growth with human and physical capital: balanced growth and transitional dynamics," Working Papers 9324, Federal Reserve Bank of Dallas.
  22. T. W. Swan, 1956. "ECONOMIC GROWTH and CAPITAL ACCUMULATION," The Economic Record, The Economic Society of Australia, vol. 32(2), pages 334-361, November.
  23. Swan, Trevor W, 2002. "Economic Growth," The Economic Record, The Economic Society of Australia, vol. 78(243), pages 375-80, December.
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