DP1019 Capital Mobility in Neoclassical Models of Growth

Author(s): Robert J. Barro, N Gregory Mankiw, Xavier Sala-i-Martin
Publication Date: September 1994
Keyword(s): Capital Mobility, Convergence, Neoclassical Growth
JEL(s): E13, F21, F43, O40, O41
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1019

The neoclassical growth model accords with empirical evidence on convergence if capital is viewed broadly to include human investments, so that diminishing returns to capital set in slowly, and if differences in government policies or other variables create substantial differences in steady-state positions. Open economy versions of the theory predict higher rates of convergence than those observed empirically, however. We show that the open economy model conforms with the evidence if an economy can borrow to finance only a portion of its capital, for example, if human capital must be financed by domestic savings.