Concludingcomments
In this chapter we briefly presented the basic insights about the growth process that can be learned from studying standard convex models with perfectly functioning markets. We emphasized three aspects of those models.
First, the impact of fiscal policy on growth. A summary of the current state of knowledge is that theoretical models have ambiguous implications about the effect of taxes on growth. The key feature is the importance of market goods in the production of human capital. If, as Lucas (1988) assumes, no market goods are needed to produce new human capital, the impact of income taxes on growth is small (or zero in some cases). If, on the other hand, market goods are necessary to produce human capital then taxes play a more important role, and they have a large impact on growth. It seems that the next step is to use detailed models of the process of human capital formation and to explore the implications that they have for the age-earnings profile to identify the parameters of the production function of human capital. A first step in that direction is in Manuelli and Seshadri (2005).A second important issue that features prominently in the discussion of the relative merits of convex and non-convex models is the role of innovation. The standard argument claims that innovation is a one-off investment (with low copying costs) and hence that this technology is inconsistent with price taking behavior. In this chapter we elaborate on the ideas discussed by Boldrin and Levine (2002) and show that it is possible to reconcile the existence of a non-convexity with competitive behavior.
The last major theme covered in this survey is the relationship between fluctuations and growth. An important question is whether technological or policy induced fluctuations affect the growth rate of an economy. This is relevant for the time series experience of a single country (e.g., the discussion about the role of post-war stabilization policies on the growth rate of the American economy), as well as the prescriptions of international agencies for national policies.
We discuss the empirical evidence and find it conflicting. It is not easy to identify a clear pattern between fluctuations and growth. To shed light on why this might be the case, we discuss a series of theoretical models. We show that the relationship between the growth rate and its standard deviation has an ambiguous sign. We also describe more precisely how one might identify the parameters of preferences and technologies that determine the sign of the relationship. This is one area of research in which more theoretical and empirical work will have a high marginal value.Acknowledgements
Both authors acknowledge the generous support of the National Science Foundation.
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