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Is there endogenous long-run growth?: Evidence from the U.S. and the U.K

Author

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  • Narayana R. Kocherlakota
  • Kei-Mu Yi

Abstract

The key feature of endogenous growth models is that they imply that permanent changes in government policy can have permanent effects on growth rates. In this paper, we develop and implement an empirical framework to test this implication. In a regression of growth rates on current and lagged policy variables, the sum of the slope coefficients for each policy variable should be nonzero (zero) for endogenous (exogenous) growth models. In our estimation, we use time series data spanning up to 100 years for the United States and 160 years for the United Kingdom. We find that the implication for exogenous growth is usually rejected when both a tax variable and a public capital variable are included in the regression; failing to include both variables biases the results in favor of exogenous growth models. Our findings show that it is possible to have exogenous growth even when U.S. and U.K. GDP growth rates appear to be stable over time. We conclude that at the aggregate level, the production function appears to exhibit constant returns to scale in reproducible inputs.

Suggested Citation

  • Narayana R. Kocherlakota & Kei-Mu Yi, 1996. "Is there endogenous long-run growth?: Evidence from the U.S. and the U.K," Staff Reports 17, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:17
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    Citations

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    Cited by:

    1. Jones,L.E. & Manuelli,R.E. & Stacchetti,E., 1999. "Technology (and policy) shocks in models of endogenous growth," Working papers 9, Wisconsin Madison - Social Systems.
    2. Hammed Adetola Adefeso, 2016. "Productive Government Expenditure and Economic Performance in sub-Saharan Africa: An Empirical Investigation," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 19(2), pages 1-18, November.
    3. Steven P. Cassou & Kevin J. Lansing, 1996. "Growth effects of a flat tax," Working Papers (Old Series) 9615, Federal Reserve Bank of Cleveland.

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