Technology (and Policy) Shocks in Models of Endogenous Growth

40 Pages Posted: 15 Jul 1999 Last revised: 7 May 2000

See all articles by Larry Jones

Larry Jones

University of Minnesota - Twin Cities - Department of Economics; National Bureau of Economic Research (NBER)

Rody Manuelli

University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER)

Ennio Stacchetti

Leonard N. Stern School of Business - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 1999

Abstract

Is there a trade-off between fluctuations and growth? The empirical evidence is mixed, with some studies (Kormendi and Meguire (1985)) finding a positive relationship, while others (Ramey and Ramey (1995)) finding the a negative one. Our objective in this paper is to understand how fundamental uncertainty can affect the long run growth rate, and what are the factors that determine the nature (positive or negative) of the relationship. Qualitatively, we show that the relationship between volatility in fundamentals and policies and mean growth can be either positive or negative. We identify the curvature of the utility function as a key parameter that determines the sign of the relationship. Quantitatively, we find that when we move from a world of perfect certainty to one with uncertainty that resembles the average uncertainty in a large sample of countries, growth rates increase somewhere between 0.17% and 0.80%, with 0.20% being a reasonable' estimate. Even though these are nontrivial changes, they are not large enough be themselves to account for the large differences in mean growth rates observed in the data. However, we find that differences in the curvature of preferences have very substantial effects on the estimated variability of stationary objects like the consumption/output ratio and hours worked. For this reason, we expect that the models considered in this paper will provide the basis of sharp estimates of the curvature parameter.

Suggested Citation

Jones, Larry E. and Manuelli, Rody E. and Stacchetti, Ennio S., Technology (and Policy) Shocks in Models of Endogenous Growth (April 1999). NBER Working Paper No. w7063. Available at SSRN: https://ssrn.com/abstract=158769

Larry E. Jones (Contact Author)

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States

National Bureau of Economic Research (NBER)

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Rody E. Manuelli

University of Wisconsin - Madison - Department of Economics ( email )

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Madison, WI 53706
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608-263-3877 (Phone)
608-262-2033 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Ennio S. Stacchetti

Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

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