Conclusions
In this chapter, we have surveyed recent contributions to growth theory inspired by Romer’s (1990) expanding variety model. Key features of the theory are increasing returns through the introduction of new products that do not displace existing ones and the existence of monopoly rents providing an incentive for firms to undertake costly innovative investments.
This model has had a tremendous impact on the literature, and we could only provide a partial review of its applications. Then, we decided to focus on a few major themes: trade and biased technical change, with their effects on growth and inequality, financial development, complementarity in the process of innovation and endogenous fluctuations.While only being a limited selection, these applications give a sense of the success of the model in providing a tractable framework for analyzing a wide array of issues in economic growth. In fact, we have shown how the model can incorporate a number of general equilibrium effects that are fundamental in the analysis of trade, wage inequality, cross-country productivity differences and other topics. Further, while the original model has linear AK-dynamics, we have surveyed recent generalizations featuring richer dynamics, which can potentially be applied to the study of financial development and innovations waves. Given its longevity, flexibility and simplicity, we are convinced that the growth model with horizontal innovation will continue to be useful in future research.
Acknowledgements
We thank Philippe Aghion, Jeremy Greenwood, Kiminori Matsuyama and Jerome Van- dennbusche for helpful comments, Zheng Song for excellent research assistance, and Christina Lonnblad for editorial assistance.
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