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Lectures Exo Growth
Lectures Exo Growth
Lorenza Rossi
Growth rates are not generally constant over time. For the world as
whole, growth rates were close to zero over most of the history but
have increased sharply in the twentieth century. For individual
countries, growth rates also change over time.
STYLIZED FACT 4
Both skilled and unskilled workers tend to migrate from poor to rich
countries or regions
Y (t ) = F (A (t ) , K (t ) , L (t ))
Assumptions
Capital accumulation
K̇ = I d K.
Firms’pro…ts maximization
FOCs
Yt = Ktα (At Lt )1 α
with 0 < α < 1
dA 1 d Ȧ
= ln (A) = = g
dT A dt A
The Solow Model
The Solow Model
The demand for capital implies
Rt = αKtα 1
(At Lt )1 α
y = k α A1 α
where y = Y /L and k = K /L
Production funtion in terms of e¢ ecient unit of labor per worker is
ỹ = k̃ α
To see the growth implications of the model, we take the log and
then di¤erentiate y = Ak α , we …nd
ẏ Ȧ k̇
= (1 α) +α
y A k
k̇ K L
notice however that k = L K . which is equal to
K L L K̇ L L̇K
=
L K K L2
then
k̇ K̇ L̇
=
k K L
L̇
where the labor force growth rate is exogenous and given by L = n.
The Solow Model
then k̃k = K̇
K
L̇
L
A
A
The Solow Model
K̇
Remember that K̇ = I d K . This means that K can be written
as,
K̇ Y
=s d
K K
Y K̇
if K is constant, then K is also constant.
k̇ K̇ L̇
While from k = K L we can rewrite,
K̇ k̇ L̇ Y /L
= + =s d
K k L K /L
then
k̇ = sy (d + n) k = sk α A1 α
(d + n ) k
is the law of motion of capital per worker, while
k̃ = s ỹ (g + d + n) k̃ = s k̃ α (g + d + n) k̃
is the law of motion of capital per unit of e¢ cient labor.
The Solow Model
The Solow diagram determines the steady state value of output per
worker
k̇ K K̇
= 0 implies = constant =) =n
k L K̇
ẏ Y Ẏ
= 0 implies = constant =) =n
y L Y
ċ C Ċ
= 0 implies = constant =) = n
c L C
K s
= k1 α = in steady state
Y d +n
The Solow Model
Consumption is
ct = F (kt ) sF (kt )
At the steady state consumption is
c = F (k ) sF (k ) = (k )α (d + n ) k
consumption is maximum if
∂c
= 0 : F 0 (k ) (d + n ) = 0
∂k
The Solow Model. The Golden rule
∂c
∂k = 0 implies
1
α (k ) α (d + n ) = 0
and thus, solving for k
1
α 1 α
GR
k =
d +n
we call k GR the Golden rule capital stock, that is the value of k such
∂c
that ∂k = 0 and consumption is maximum.
The Solow Model. The Golden rule
The Solow Model. The Golden rule
Ȧ
Consider now A 6= 0 = g . In the steady state k̃ = 0 and
1
s 1 α
k̃ =
d +n+g
thus α
α s 1 α
ỹ = k̃ =
d +n+g
while output per worker is
α
s 1 α
y (t ) = A (t )
d +n+g
Ȧ
Consider now A 6= 0 = g . The Solow diagram becomes
The Solow Model
k̃ K̇ k̇
= 0 implies = g + n and = g
k̃ K k
ỹ Ẏ ẏ
= 0 implies = g + n and = g
ỹ Y y
c̃ Ċ ċ
= 0 implies = g + n and = g
c̃ C c
K̇ Ẏ K̇ Ẏ
…nally notice that given K = Y =) K Y = 0 and thus
K s
= = constant
Y g +n+d
The Solow Model
Ḃ = wt Lt + rt Bt Ct
where B are assets, w is the wage rate, r is the interest rate. In per
capita terms
ḃ = wt + (rt n) bt ct
The Ramsey Growth Model
The Household Problem
The trasversality condition
0 1
Zt
B (rs n )ds C
B C
B C
lim Bbt e 0 C 0
t !∞ B C
@ A
∂H
= 0 : u 0 ( ct ) e ( n ρ )t
= µt
∂c
∂H
= µ̇ : (rt n ) µt = µ̇
∂b
∂H
= ḃ : wt + (rt n ) µt ct = ḃ (is the constraint)
∂µ
The Ramsey Growth Model
The Household Problem
From the …rst FOC
00
u 0 ( ct ) e ( n ρ )t
= µt =) µ̇t = u (ct ) e (n ρ )t
ċ + (n ρ ) u 0 ( ct ) e ( n ρ )t
combining with the second FOC, i.e. with (rt n ) µt = µ̇, we get
00
(rt n ) µ t = u ( ct ) e ( n ρ )t
ċ + (n ρ ) u 0 ( ct ) e ( n ρ )t
or
00
(rt n ) u 0 ( ct ) e ( n ρ )t
= u ( ct ) e ( n ρ )t
ċ + (n ρ ) u 0 ( ct ) e ( n ρ )t
Firms Problem
Pro…ts Maximization
π = F (K , L) (r + δ ) K wL
f 0 (k ) = (r + d )
f (k ) kf 0 (k ) = w
The Ramsey Growth Model
Equilibrium
The law of motion of per capita capital
k̇ = f (k ) (n + d ) k c
k̇ = 0 : f (k ) c = (n + d ) k
The Dynamics
∂k̇ ∂ċ 00
Notice that ∂c = 1 < 0, while ∂k = 1θ f (k ) c < 0
The Ramsey Growth Model
The Dynamics
f 0 (k ) = n + d
In the Ramsey model, the modi…ed gold rule, which is obtained from
consumer problem implies
f 0 k Ramsey = ρ+d
Y = F (K , L) = C + K̇ + dK
f (k ) = c + k̇ + (d + n) k
The Ramsey Growth Model
∂H θ (n ρ )t
= 0:c e µ=0
∂c
∂H
= µ̇ : µ (d + n ) µ̇ = 0
∂k
The Ramsey Growth Model
k̇ = f (k ) c (d + n ) k
= f (k ) (d + n ) k
c
0
f (k ) = ( ρ + n )
where h = e ψu is a constant.
We can redi…ne the production function in terms of y /(Ah) = ỹ
ỹ = k̃ α
and the capital accumulation becoms
k̃ = sk ỹ (n + g + d ) k̃
The Solow Model with Human Capital
THE STEADY STATE
k̃ = 0 implies
k̃ sk
=
ỹ ( n + g + d)
substituting in the production function
α
sk 1 α
ỹ =
(n + g + d )
in terms of output per worker
α
sk 1 α
y (t ) = hA (t )
n+g +d
From α
sk 1 α
y (t ) = hA (t )
n+g +d
we can state that some countries are rich because they:
1 have higher investment in physical capital;
2 spend a large fraction of time accumulating skills h = e ψu ;
3 have low population rate;
4 have higher level of technology.
The Solow Model with Human Capital
y
ŷ =
yUS
or α
ŝk 1 α
ŷ = ĥÂ
x̂
where x = (n + g + d ) .
The Solow Model with Human Capital
The Fit of the Neoclassical Growth model, 1997 (source: Jones book)
The Solow Model with Human Capital
time
The Green Solow Model and the Environmental Kunetz
Curve
US evidence:
2. Emission per unit of output were falling before absolute emissions
started to fall
The Green Solow Model and the Environmental Kunetz
Curve
US evidence:
3. Abatement cost per unit of output have been relatively constant
The Green Solow Model and the Environmental Kunetz
Curve
EU evidence:
European data show a strong evidence of an Environmental Kunetz
curve relationship
The evidence on cross-country data is mixed
The Green Solow Model
The Green Solow model augments the standard Solow model with
pollution and abatement activity
The production function is
Y = F (K , BL)
where B is the labor augmenting technology.
the low of motion of capital is standard
K̇ = sY dK
Net Emission of Pollution E
FA
E = ΩF ΩA F , F A = ΩF 1 A 1, = ΩFa (θ )
F
where Ω is pollution from Y , A is the abatement with CRS production
A
function A 1, FF , and technology growth at exogenous rate gA . F
A
is total production activity, F A is total abatement activity. θ = FF
and a (θ ) = 1 A (1, θ ) with a (0) = 1, a0 (θ ) < 0, and a00 (θ ) > 0.
The Green Solow Model
Y =F F A = (1 θ) F
y = f (k ) (1 θ )
k̇ = sy (n + d + gB ) k
e = f (k ) Ωa (θ )
E
e= = f (k ) Ωa (θ )
BL
we can rewrite
E = BLf (k ) Ωa (θ ) = BLk α Ωa (θ )
Ė Ḃ L̇ k̇ Ω̇
= + +α +
E B L k Ω
The Green Solow Model
Ė k̇
= α + gB + n gA
E k
|{z} | {z }
gE
transitional Emission growth
component along the BGP
The Green Solow Model
The growth rate of emission along the balanced growth path, i.e.
along k̇k = 0 is
gE = gB + n gA
we can de…ne substainable growth as the condition implying gE < 0
1) gB > 0
2) gA > gB + n
Considering
Ė k̇
= α + gB + n gA
E k
and
k̇
= sk α 1 (1 θ ) (d + n + gB )
k
Assuming substainable growth, i.e. gE < 0 and multiplying by α the
second equation
k̇ 1
α = αsk α (1 θ) α (d + n + gB )
k
The Green Solow Model and the Environmental Kunetz
Curve
The Green Solow Model and the Environmental Kunetz
Curve
PROPOSITION 1
If growth is substainable gE < 0 and k (0) < k (T ) , then emissions
grow initially and then fall continuously. An EKC occurs.
If growth is substainable gE < 0 and k (0) > k (T ) , then emissions
fall continuously
If growth is unsubstainable gE > 0, then emissions growth but at a
decreasing rate.
PROPOSITION 2
Identical economies with di¤erent initial values produce di¤erent per
capita income and emission pro…les over time. The peak level of
emissions and the associated level of per capita income are not unique.
This can explain the mixed evidence on the EKC in cross-country data.
It is thus important to control for initial conditions and unobserved
eterogeneity.
The Green Solow Model and the Environmental Kunetz
Curve
The Green Solow Model and the Environmental Kunetz
Curve