Rich Nations, Poor Nations: How Much Can Multiple Equilibria Explain?
34 Pages Posted: 3 Jun 2005
Date Written: January 2004
This paper asks whether the income gap between rich and poor nations can be explained by multiple equilibria. We explore the quantitative implications of a simple two sector general equilibrium model that gives rise to multiplicity, and calibrate the model for a large number of countries. Under the assumptions of the model, around a quarter of the world's economies are found to be in a low output equilibrium. The output gains associated with an equilibrium switch are sizeable, but well short of the vast income disparity observed in the data.
Keywords: Poverty traps, multiple equilibria, TFP differences, calibration
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