Growth Theory
Endogenous effects

Persistent cross-country differences in the growth rates of per capita income have stimulated a burgeoning literature on aggregate economic growth, which has recently focused on the endogenous long-run effects of the market allocation of resources rather than exogenous technological parameters. In Discussion Paper No. 592, Zvi Eckstein, Costas Foulides and Research Fellow Tryphon Kollintzas develop a stochastic, dynamic, general equilibrium model that combines both exogenous and endogenous sources of growth. In their model, production of consumption and investment goods are separate, preferences and the production technology are characterized by translog functional forms, and human and physical capital accumulation follow Cobb-Douglas functions. The authors characterize the competitive equilibrium and the underlying social optimum, which differ because the endogenous sources of growth introduce externalities. They also examine a tax-subsidy scheme that causes the (recursive) competitive equilibrium to coincide with the social optimum.
In equilibrium, they find that human and physical capital, the production of investment goods, time spent at work and product and factor shares can all be modelled as log-linear processes exhibiting a variety of possible growth patterns. This result has four main implications. First, the various kinds of economic growth may be classified by their source. Thus exogenous sources may dictate steady-state growth while endogenous sources dominate transitional dynamics (or vice versa). Second, the model is consistent with a wide variety of growth patterns identified in analyses of trends of aggregate economic variables. For example, the growth of per capita consumption or human and physical capital may follow a random walk with drift, linear time trends, an autoregressive process with a root greater than one, or cyclical and periodic patterns with or without positive average growth. Any of these patterns could be due to exogenous and/or endogenous growth sources. Third, over time, each endogenous variable depends directly on preferences and production parameters, and a set of examples encompassing the results of the existing literature can be derived. Fourth, while the model's main features are most easily expressed in terms of equations that involve unobservable variables such as the stock of human capital, the authors show that the growth properties of the equilibrium can also be characterized in terms of observable flow variables such as hours of work and investment in human capital for which data are readily available.

On the Many Kinds of Growth
Zvi Eckstein, Costas Foulides and Tryphon Kollintzas

Discussion Paper No. 592, December 1991 (IM)