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Distortions in the Neoclassical Growth Model: A Cross-Country Analysis

  • Brinca, Pedro

    ()

    (Dept. of Economics, Stockholm University)

This paper investigates the properties of distortions that manifest themselves as wedges in the equilibrium conditions of the neoclassical growth model across a sample of OECD countries for the 1970-2011 period. The quantitative relevance of each wedge and its robustness in generating fluctuations in macroeconomic aggregates is assessed. The eciency wedge proves to be determinant in enabling models to replicate movements in output and investment, while the labor wedge is important to predict uctuations in hours worked. Modeling distortions to the savings decision holds little quantitative or qualitative relevance. Also, investment seems to be the hardest aggregate to replicate, as prediction errors concerning output and hours worked are typically one order of magnitude smaller. These conclusions are statistically significant across the countries in the sample and are not limited to output drops. Finally, the geographical distance between countries and their degree of openness to trade are shown to contain information with regard to the wedges, stressing the importance of international mechanisms of transmission between distortions to the equilibrium conditions of the neoclassical growth model.

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Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2013:13.

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Length: 56 pages
Date of creation: 12 Sep 2013
Date of revision:
Handle: RePEc:hhs:sunrpe:2013_0013
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Department of Economics, Stockholm, S-106 91 Stockholm, Sweden

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