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Growth Outside The Stable Path: Lessons From The European Reconstruction

  • Francisco Alvarez-Cuadrado

    ()

This paper exploits a natural experiment, the large destruction of capital in continental Europe during World War II, to characterize the transitional dynamics of an economy that begins with a capital stock below its steady state level. We use these regularities as a benchmark to discriminate among competing growth specifications. A model that combines non-separabilities in preferences with a technology that restricts the degree of substitutability between inputs outperforms the widely used AK and Cobb-Douglas specifications with time-separable preferences. Our results suggest that policy evaluations based in growth models that overlook non-separabilities in preferences or impose strong restrictions on the technological structure might be grossly misleading.

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Paper provided by McGill University, Department of Economics in its series Departmental Working Papers with number 2006-02.

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Length: 32 pages
Date of creation: Aug 2006
Date of revision:
Handle: RePEc:mcl:mclwop:2006-02
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