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The Pillars of Potential Growth and the Role of Policy: A Panel Data Approach

Author

Listed:
  • Lanzafame, Matteo

    () (University of Messina)

  • Felipe, Jesus

    () (Asian Development Bank)

  • Sotocinal, Noli

    () (Asian Development Bank)

  • Bayudan-Dacuycuy, Connie

    () (Ateneo de Manila University)

Abstract

Potential output growth generally decelerated after the global financial crisis during 2008–2009. This paper examines the possible determinants of potential output growth using Bayesian Model Averaging and assesses how the determinants can be used to increase the growth of potential output. It finds that the long-term growth of working-age population, the tertiary level gross enrollment ratio, the technology gap with the United States (US), labor market rigidity, trade openness, financial integration and the quality of institutions robustly affect potential output growth. Using Harrod’s definition of potential output growth as the sum of the long-run growth rates of the labor force and labor productivity, we find that the trend growth rate of working-age population is a good proxy variable for long-run labor force growth. Under this definition, the other determinants affect potential output growth through their impact on the growth of labor productivity. The paper finds support for the hypotheses that tertiary enrollment and trade openness affects potential output growth nonlinearly. It also finds that trade openness and tertiary enrollment have nonlinear effects on potential output growth, and that the technology gap with the US and financial integration have statistically significant interaction effects on potential output growth. Results suggest that reforms aimed at reducing the technology gap with the US and increasing the extent of financial integration have lower impact on countries with high-quality institutions.

Suggested Citation

  • Lanzafame, Matteo & Felipe, Jesus & Sotocinal, Noli & Bayudan-Dacuycuy, Connie, 2016. "The Pillars of Potential Growth and the Role of Policy: A Panel Data Approach," ADB Economics Working Paper Series 482, Asian Development Bank.
  • Handle: RePEc:ris:adbewp:0482
    as

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    References listed on IDEAS

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    1. Dani Rodrik, 2008. "Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Banks Economic Growth in the 1990s: Learning from a Decade of Reform," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 55(2), pages 135-156, June.
    2. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 70(1), pages 65-94.
    3. Enrique Moral-Benito, 2012. "Determinants of Economic Growth: A Bayesian Panel Data Approach," The Review of Economics and Statistics, MIT Press, vol. 94(2), pages 566-579, May.
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    6. Law, Siong Hook & Singh, Nirvikar, 2014. "Does too much finance harm economic growth?," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 36-44.
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    Citations

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    Cited by:

    1. Roberta De Santis & Piero Esposito & Elena Masi, 2017. "Are there common structural determinants of potential output growth in Europe? An empirical exercise for 11 EMU countries," Working Papers 4, Department of the Treasury, Ministry of the Economy and of Finance.
    2. Foster-McGregor, Neil & Verspagen, Bart, 2016. "The Role of Structural Transformation in the Potential of Asian Economic Growth," ADB Economics Working Paper Series 479, Asian Development Bank.

    More about this item

    Keywords

    determinants of growth; potential output growth; reforms;

    JEL classification:

    • O29 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Other
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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