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Title: Investment Demand and Structural Change

Author(s): Manuel García-Santana, Josep Pijoan-Mas and Lucciano Villacorta

Publication Date: November 2016

Keyword(s): Neo-classical Growth Model, structural change and Transitional Dynamics

Programme Area(s): International Macroeconomics and Finance and Macroeconomics and Growth

Abstract: We study the joint evolution of the sectoral composition and the investment rate of developing economies. Using panel data for several countries in different stages of development, we document three novel facts: (a) the share of industry and the investment rate are strongly correlated and follow a hump-shaped profile with development, (b) investment goods contain more domestic value added from industry and less from services than consumption goods do, and (c) the evolution of the sectoral composition of investment and consumption goods differs from the one of GDP. We build and estimate a multi-sector growth model to fit these patterns and provide two important results. First, the hump-shaped evolution of investment demand explains half of the hump in industry with development. Second, asymmetric sectoral productivity growth helps explain the decline in the relative price of investment goods along the development path, which in turn increases capital accumulation and promotes growth.

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Bibliographic Reference

García-Santana, M, Pijoan-Mas, J and Villacorta, L. 2016. 'Investment Demand and Structural Change'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11636