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.