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Solow or Lucas?: Testing Growth Models Using Panel Data from OECD Countries

Author

Listed:
  • Jens Arnold

    (OECD)

  • Andrea Bassanini

    (OECD)

  • Stefano Scarpetta

    (OECD)

Abstract

In this paper, we test whether the growth experience of a sample of OECD countries over the past three decades is more consistent with the human-capital augmented Solow model of exogenous growth, or with an endogenous growth model à la Uzawa-Lucas with constant returns to scale to “broad” (human and physical) capital. We exploit the different non-linear restrictions implied by these two models to discriminate between them. Using pooled crosscountry time-series data, we specify our growth regression by imposing cross-country homogeneity restrictions only on long-run coefficients, while letting the speed of convergence and short term dynamics to vary across countries. While there are indeed good reasons to believe in common long-run coefficients, given that OECD countries have access to common technologies and have intensive intra-industry trade and foreign direct investment, the theoretical models imply that the speed of convergence to the steady state differs across countries because of cross-country heterogeneity in population growth, technical change and progressiveness of the income tax. Therefore, standard dynamic fixed effect specifications, by imposing cross-country homogeneity restrictions on speed of convergence and short-run parameters, suffer from a heterogeneity bias and are not suited to implement our tests. The results suggest a strong effect of human capital accumulation: the estimated long-run effect on output of one additional year of education (about 6-9%) is also within the range of the estimates obtained in microeconomic analyses of the private returns to schooling. Our estimated speed of convergence is too fast to be compatible with the augmented Solow model, while is consistent with the Uzawa-Lucas model with constant returns to scale. This main finding is robust to several robustness tests. Solow ou Lucas?Un test des modèles de croissance basé sur des données en panel pour les pays de l'OCDE Dans cet article nous analysons le processus de croissance dans un groupe de pays de l’OCDE au cours des trois dernières décennies. Nous cherchons à établir si ce processus est plus conforme à un modèle de croissance exogène à la Solow ou bien à un modèle de croissance endogène à la Uzawa-Lucas avec des rendements d’échelle constants par rapport au capital au sens large (humain et physique). Pour cela, nous exploitons les contraintes non-linéaires propres aux deux modèles et nous étudions leur conformité avec les données. En utilisant des données de panel, nous spécifions une équation de croissance dans laquelle les paramètres de court terme et la vitesse de convergence varient d’un pays à l’autre, alors que seuls les paramètres de long terme sont supposés communs. Alors qu’il y a de bonnes raisons pour faire l’hypothèse que les coefficients à long terme sont égaux entre les pays de l’OCDE qui ont accès aux mêmes technologies et ont des relations commerciales étroites, les deux modèles théoriques suggèrent que la vitesse de convergence devrait différer selon les pays en raison de différences dans le taux de croissance de la population, le progrès technique et le taux de progressivité des impôts. Dans ces conditions, les spécifications dynamiques standard à effets fixes qui imposent l’homogénéité de tous les paramètres souffrent d’un biais et ne sont pas valables pour notre test des deux modèles. Nos résultats suggèrent un impact positif et significatif de l’accumulation du capital humain sur la croissance de la production par tête : une année supplémentaire de niveau moyen d’études dans un pays aurait un effet positif à long terme sur la production (de 6-9 %), ce qui est en accord avec l’évidence microéconomique sur le taux de rendement privé de l’investissement en éducation. La vitesse de convergence estimée est trop rapide pour être compatible avec le modèle de Solow. En revanche, nos résultats sont compatibles avec un modèle de Uzawa-Lucas avec des rendements d’échelle constants. Ce résultat principal est confirmé par des tests de robustesse.

Suggested Citation

  • Jens Arnold & Andrea Bassanini & Stefano Scarpetta, 2007. "Solow or Lucas?: Testing Growth Models Using Panel Data from OECD Countries," OECD Economics Department Working Papers 592, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:592-en
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    File URL: http://dx.doi.org/10.1787/028487061153
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    Cited by:

    1. Norman Gemmell & Richard Kneller & Ismael Sanz, 2014. "The growth effects of tax rates in the OECD," Canadian Journal of Economics, Canadian Economics Association, vol. 47(4), pages 1217-1255, November.
    2. Jing Xing, 2011. "Does tax structure affect economic growth? Empirical evidence from OECD countries," Working Papers 1120, Oxford University Centre for Business Taxation.
    3. Arnold, Jens & Bassanini, Andrea & Scarpetta, Stefano, 2011. "Solow or Lucas? Testing speed of convergence on a panel of OECD countries," Research in Economics, Elsevier, vol. 65(2), pages 110-123, June.
    4. Joerg Baten & Jan Zanden, 2008. "Book production and the onset of modern economic growth," Journal of Economic Growth, Springer, vol. 13(3), pages 217-235, September.
    5. Aiello, Francesco & Pupo, Valeria, 2012. "Structural funds and the economic divide in Italy," Journal of Policy Modeling, Elsevier, vol. 34(3), pages 403-418.
    6. Balazs Egert & Tomasz Kozluk & Douglas Sutherland, 2009. "Infrastructure and Growth: Empirical Evidence," CESifo Working Paper Series 2700, CESifo Group Munich.
    7. Francesco Aiello & Valeria Pupo, 2009. "Structural Funds And Economic Divide In Italy," Working Papers 200914, Università della Calabria, Dipartimento di Economia, Statistica e Finanza "Giovanni Anania" - DESF.
    8. Markus Eberhardt & Francis Teal, 2011. "Econometrics For Grumblers: A New Look At The Literature On Cross‐Country Growth Empirics," Journal of Economic Surveys, Wiley Blackwell, vol. 25(1), pages 109-155, February.
    9. Jens Matthias Arnold & Bert Brys & Christopher Heady & Åsa Johansson & Cyrille Schwellnus & Laura Vartia, 2011. "Tax Policy for Economic Recovery and Growth," Economic Journal, Royal Economic Society, vol. 121(550), pages 59-80, February.
    10. Norman Gemmell & Richard Kneller & Ismael Sanz, 2016. "Does the Composition of Government Expenditure Matter for Long-Run GDP Levels?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(4), pages 522-547, August.
    11. Selin Ozyurt & Stephane Dees, 2015. "Regional dynamics of growth in the European Union: To what extent spatial spillovers matter?," ERSA conference papers ersa15p242, European Regional Science Association.
    12. Jochen Hartwig, 2009. "A panel Granger-causality test of endogenous vs. exogenous growth," KOF Working papers 09-231, KOF Swiss Economic Institute, ETH Zurich.
    13. Marta C. N. Simões, 2011. "Education Composition and Growth: A Pooled Mean Group Analysis of OECD Countries," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(4), pages 455-471, December.
    14. Dées, Stéphane & Özyurt, Selin, 2015. "Regional dynamics of economic performance in the EU: To what extent spatial spillovers matter?," Working Paper Series 1870, European Central Bank.
    15. Valeria Pupo & Francesco Aiello, 2009. "L'impatto della politica regionale dell'Unione Europea. Uno studio sulle regioni italiane," Rivista italiana degli economisti, Società editrice il Mulino, issue 3, pages 421-454.
    16. Wako, Hassen, 2011. "Effectiveness of foreign aid in sub-Saharan Africa: Does disaggregating aid into bilateral and multilateral components make a difference?," MPRA Paper 72617, University Library of Munich, Germany.
    17. Santiago Acosta Ormaechea & Jiae Yoo, 2012. "Tax Composition and Growth; A Broad Cross-Country Perspective," IMF Working Papers 12/257, International Monetary Fund.
    18. Romain Bouis & Romain Duval & Fabrice Murtin, 2011. "The Policy and Institutional Drivers of Economic Growth Across OECD and Non-OECD Economies: New Evidence from Growth Regressions," OECD Economics Department Working Papers 843, OECD Publishing.

    More about this item

    Keywords

    capital humain; croissance; données de panel; growth; human capital; panel data;

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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