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Why is Europe lagging behind?

  • Pyyhtiä, Ilmo

    ()

    (Bank of Finland Research)

Registered author(s):

    This paper builds on the literature on growth in searching for explanations for the divergent growth performance between the EU countries and the United States. We emphasise the role of R&D investment and perhaps different degrees of elasticity of substitution between capital and labour. We estimate two different production functions, namely Cobb-Douglas and CES specifications, with physical capital, a measure of labour, and residual ‘technical trend’ as inputs. Our first finding is that in many ICT-producing and using countries such as Denmark, Finland, Ireland, Sweden and the United States technical progress has been accelerating during the past decade. Secondly, this speeding up of technical progress has been associated with R&D investment and perhaps with increasing elasticity of substitution between capital and labour. Hence, our results suggest that there is no growth paradox in Europe: the R&D factor and the elasticity of substitution between capital and labour which have been known to be important factors of economies’ growth potential, actually explain a significant part of the divergent growth performance of the European economies as well.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0703netti.pdf
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    Paper provided by Bank of Finland in its series Research Discussion Papers with number 3/2007.

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    Length: 45 pages
    Date of creation: 28 Feb 2007
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2007_003
    Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/

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    4. Johnson, Paul & Durlauf, Steven N & Temple, Johnathan R. W., 2004. "Growth Econometrics," Vassar College Department of Economics Working Paper Series 61, Vassar College Department of Economics.
      • Durlauf, Steven N. & Johnson, Paul A. & Temple, Jonathan R.W., 2005. "Growth Econometrics," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 8, pages 555-677 Elsevier.
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    6. Mankiw, N Gregory & Romer, David & Weil, David N, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 407-37, May.
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    17. repec:chb:bcchwp:03 is not listed on IDEAS
    18. Berndt, Ernst R, 1976. "Reconciling Alternative Estimates of the Elasticity of Substitution," The Review of Economics and Statistics, MIT Press, vol. 58(1), pages 59-68, February.
    19. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March.
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