DP17222 Additive Growth

Growth theory is based on the assumption of exponential total factor productivity (TFP) growth. Across countries and time periods I find that TFP growth is actually linear. Unlike the exponential model, the additive growth model provides useful medium-term forecasts of TFP. It also explains the TFP slowdown and the volatility puzzle, and predicts falling real interest rates. For the distant future the model predicts ever increasing increments in standards of living but with growth rates that converge to zero. For the distant past the model suggests that the size of TFP increments has changed in the late 1600’s, the early 1800’s, and around 1930.