| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Copyright © The Authors 2007. Published by Oxford University Press.
Solow (1956) as a model of cross-country growth dynamics
* Central Bank and Financial Services Authority of Ireland, e-mail: kmcquinn{at}centralbank.ie; karl.whelan{at}centralbank.ie
 |
Abstract |
|---|
Despite the widespread popularity of the Solow growth model, much of the recent empirical work based on the classic framework misrepresents a crucial feature of the model. Namely, the growth rate of technological progress, assumed to be exogenous in the Solow model, is often identified as being constant across countries. This simplification of the behaviour of technological progess runsounter to the evidence and has had a number of significant implications for the interpretation of the Solow model. One implication has been an overemphasis on the role of factor accumulation in explaining cross-country income differentials. In addition, the commonly cited empirical result that the speed of conditional convergence is slower than predicted by the Solow model is a function of this inaccurate assumption about technology, rather than due to a failure of the model itself.
Key Words: growth • convergence • TFP • Solow
The views expressed in this paper are our own, and do not necessarily reflect the views of the Central Bank and Financial Services Authority of Ireland or the ESCB.
1 The popularity of Mankiw, Romer, and Weil's contribution can be judged from the fact that it is the most commonly cited work by papers included in the REPEC collection of online papers in economics. See http://ideas.repec.org/top/top.item.nbcites.html
2 It is well known, of course, that Solow's results about long-run steady-state growth apply for any production function with diminishing marginal returns to capital. However, we wish to emphasize the dynamics of the model, and these are usually derived by obtaining a first-order log-linearization, which is equivalent to assuming a Cobb–Douglas production function.
3 While we have derived this representation from a Cobb–Douglas production function, a relationship expressing output per worker as a function of technology and the capital–output ratio can be derived for any constant returns to scale production function featuring labour-augmenting technological change. See McQuinn and Whelan (2006).
4 This equation is obtained by taking logs of equation (4) and then assuming the economy is approximately at its steady state so that equation (7) approximately holds.
5 Similarly, when we run this regression using the year 2000 for the left-hand side and sample averages over 1960–2000, we obtain a value of 
of 0.57.
6 Details behind our calculations of the capital stocks are described in Appendix B.
7 Monte Carlo exercises simulating the steady state of the Solow model under the assumption of 
and a covariance matrix for TFP, investment shares, and population growth rates that are calibrated to match those in the data confirm that the estimated coefficients in this regression are perfectly consistent with a capital share of one-third.
8 In this sense, we agree strongly with Erich Gundlach (2005) that the MRW specification of technology contradicts the fundamental insight of the Solow model. We would disagree, however, with Gundlach's characterization of the Solow model as assuming that the capital–output ratio is constant. Adjustment of the capital–output ratio is the mechanism by which the model adjusts to its steady-state path. That such a stable adjustment process exists was one of the key contributions of Solow's analysis.
9 This result comes from the fact that equation (8) has an analytical solution of the form
|
|
10 Bond (2002) provides a useful detailed discussion of these econometric problems.
12 For instance, for our preferred depreciation rate of 6 per cent, the starting 1960 value of the capital stock receives a weight of (1 – 0.06)40 = 0.084 in the 2000 stock.
CiteULike 
Connotea 
Del.icio.us What's this?
This article has been cited by other articles:
|
|
 |
|
  R. M. Solow The last 50 years in growth theory and the next 10 Oxf. Rev. Econ. Policy, March 1, 2007; 23(1): 3 - 14. [Abstract] [Full Text] [PDF]
|
|