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Learning About Growth

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  • Gina Pieters

    (University of Minnesota)

  • Andy Glover

    (University of Minnesota)

Abstract

We introduce a model in which a consumers must learn whether a country's growth rate shock is permanent or transitory. We show that for developing countries, TFP growth rates have been highly volatile, while for developed country the growth rate is comparatively stable. This difference is sufficient to explain the allocation puzzle under the assumption that the initial correlation between forecasted and realized growth rates is negative. In addition, we document that the allocation puzzle puzzle decreases over time - the ten year correlation between inflows and growth rates is more negative than the twenty year correlation - in agreement with our model predictions. We interpret this as evidence that the learning mechanism underlying our model is relevant to understanding the differences in behavior of developed and developing countries.

Suggested Citation

  • Gina Pieters & Andy Glover, 2010. "Learning About Growth," 2010 Meeting Papers 1059, Society for Economic Dynamics.
  • Handle: RePEc:red:sed010:1059
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    File URL: https://economicdynamics.org/meetpapers/2010/paper_1059.pdf
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    References listed on IDEAS

    as
    1. Eswar S. Prasad & Raghuram G. Rajan & Arvind Subramanian, 2007. "Foreign Capital and Economic Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 153-230.
    2. Ricardo Hausmann & Lant Pritchett & Dani Rodrik, 2005. "Growth Accelerations," Journal of Economic Growth, Springer, vol. 10(4), pages 303-329, December.
    3. Emine Boz & Christian Daude & Ceyhun Bora Durdu, 2008. "Emerging market business cycles revisited: learning about the trend," International Finance Discussion Papers 927, Board of Governors of the Federal Reserve System (U.S.).
    4. Pierre-Olivier Gourinchas & Olivier Jeanne, 2013. "Capital Flows to Developing Countries: The Allocation Puzzle," Review of Economic Studies, Oxford University Press, vol. 80(4), pages 1484-1515.
    5. Fatih Guvenen, 2007. "Learning Your Earning: Are Labor Income Shocks Really Very Persistent?," American Economic Review, American Economic Association, vol. 97(3), pages 687-712, June.
    6. Chang-Tai Hsieh & Peter J. Klenow, 2007. "Relative Prices and Relative Prosperity," American Economic Review, American Economic Association, vol. 97(3), pages 562-585, June.
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