Economic development is typically accompanied by a very pronounced migration of labor from rural to urban employment. This migration, in turn, is often associated with large scale urban underemployment. Both factors appear to play a very prominent role in the process of development. We consider a model in which rural-urban migration and urban underemployment are integrated into an otherwise conventional neoclassical growth model. Unemployment arises not from any exogenous rigidities, but from an adverse selection problem in labor markets. We demonstrate that, in the most natural case, rural-urban migration—and its associated underemployment—can be a source of multiple, asymptotically stable steady state equilibria, and hence of development traps. They also easily give rise to an indeterminacy of perfect foresight equilibrium, as well as to the existence of a large set of periodic equilibria displaying undamped oscillation. Many such equilibria display long periods of uninterrupted growth and rural-urban migration, punctuated by brief but severe recessions associated with net migration from urban to rural employment. Such equilibria are argued to be broadly consistent with historical U.S. experience.
We examine an otherwise standard model of capital accumulation to which spatial separation and limited communication create a role for money and shocks to portfolio needs create a role for banks. In this context we examine the existence, multiplicity, and dynamical properties of monetary equilibria with positive nominal interest rates. Moderate levels of risk aversion can lead to the existence of multiple monetary steady states, all of which can be approached from a given set of initial conditions. In addition, even if there is a unique monetary steady state, monetary equilibria can be indeterminate, and oscillatory equilibrium paths can be observed. Thus financial market frictions are a potential source of both indeterminacies and endogenously arising economic volatility.
We also consider the consequences of monetary policy actions that rearrange the composition of government liabilities. Contractionary monetary policy activities can have complicated consequences, depending especially on the nature of the steady state equilibrium that obtains when there are multiple steady states. Under plausible conditions, however, a permanent contractionary change in monetary policy raises both the nominal rate of interest and the rate of inflation, and reduces long-run output levels. Thus liquidity provision by a central bank—just as by the banking system as a whole—can be growth promoting. Loose monetary policy also is conducive to avoiding development trap phenomena.
A framework is developed with what we call technology capital. A country is a measure of locations. Absent policy constraints, a firm owning a unit of technology capital can produce the composite output good using the unit of technology capital at as many locations as it chooses. But it can operate only one operation at a given location, so the number of locations is what constrains the number of units it operates using this unit of technology capital. If it has two units of technology capital, it can operate twice as many operations at every location. In this paper, aggregation is carried out and the aggregate production functions for the countries are derived. Our framework interacts well with the national accounts in the same way as does the neoclassical growth model. It also interacts well with the international accounts. There are constant returns to scale, and therefore no monopoly rents. Yet there are gains to being economically integrated. In the framework, a country’s openness is measured by the effect of its policies on the productivity of foreign operations. Our analysis indicates that there are large gains to this openness.
Empirical studies quantifying the benefits of increased foreign direct investment (FDI) have been unable to provide conclusive evidence of a positive impact on the host country’s economic performance. I show that the lack of robust evidence is not inconsistent with theory, even if the gains to FDI openness are large. Anticipated welfare gains to increased inward FDI should lead to immediate declines in domestic investment and employment and eventual increases. Furthermore, since part of FDI is intangible investment that is expensed from company profits, gross domestic product (GDP) and gross national product (GNP) should decline during periods of abnormally high FDI investment. Using the model of McGrattan and Prescott (2009) and data from the IMF Balance of Payments to parameterize the time paths of FDI openness for each country in the sample, I do not find an economically significant relationship between the amount of inward FDI a country did over the period 1980—2005 and the growth in real GDP predicted by the model. This finding rests crucially on the fact that most of these countries are still in transition to FDI openness.
It is widely believed that an important factor underlying the rapid growth in China is increased foreign direct investment (FDI) and the transfer of foreign technology capital, which is accumulated know-how from investment in research and development (R&D), brands, and organizations that is not specific to a plant. In this paper, we study two channels through which FDI can contribute to upgrading of the stock of technology capital: knowledge spillovers and appropriation. Knowledge spillovers lead to new ideas that do not directly compete or devalue the foreign affiliate's stock. Appropriation, on the other hand, implies a redistribution of property rights over patents and trademarks; the gain to domestic companies comes at a loss to the multinational company (MNC). In this paper we build these sources of technology capital transfer into the framework developed by McGrattan and Prescott (2009, 2010) and introduce an endogenously-chosen intensity margin for operating technology capital in order to capture the trade-offs MNCs face when expanding their markets internationally. We first demonstrate that abstracting from technology capital transfers results in predicted bilateral FDI inflows to China that are grossly at odds with the data. We then use the bilateral inflows to parameterize the model with technology capital transfers and compute the global economic impact of Chinese policies that encouraged greater inflows of FDI and technology capital transfers. Microevidence on automobile patents is used to support our parameter choices and main findings.
In 1950 Mexico entered an economic takeoff and grew rapidly for more than 30 years. Growth stopped during the crises of 1982–1995, despite major reforms, including liberalization of foreign trade and investment. Since then growth has been modest. We analyze the economic history of Mexico 1877–2010. We conclude that the growth 1950–1981 was driven by urbanization, industrialization, and education and that Mexico would have grown even more rapidly if trade and investment had been liberalized sooner. If Mexico is to resume rapid growth — so that it can approach U.S. levels of income — it needs further reforms.
Randomness in individual discovery tends to spread out productivities in a population, while learning from others keeps productivities together. In combination, these two mechanisms for knowledge accumulation give rise to long-term growth and persistent income inequality. This paper considers a world in which those with more useful knowledge can teach those with less useful knowledge, with competitive markets assigning students to teachers. In equilibrium, students who are able to learn quickly are assigned to teachers with the most productive knowledge. The long-run growth rate of this economy is governed by the rate at which the fastest learners can learn. The income distribution reflects learning ability and serendipity, both in individual discovery and in the assignment of students to teachers. Because of naturally arising indeterminacies in this assignment, payoff irrelevant characteristics can be predictors of individual income growth. Ability rents can be large when fast learners are scarce, when the process of individual discovery is not too noisy, and when overhead labor costs are low.
Starting in the early 1990s, countries in southern Europe experienced low productivity growth alongside declining real interest rates. We use data for manufacturing ﬁrms in Spain between 1999 and 2012 to document a signiﬁcant increase in the dispersion of the return to capital across ﬁrms, a stable dispersion of the return to labor, and a signiﬁcant increase in productivity losses from capital misallocation over time. We develop a model with size-dependent ﬁnancial frictions that is consistent with important aspects of ﬁrms’ behavior in production and balance sheet data. We illustrate how the decline in the real interest rate, often attributed to the euro convergence process, leads to a signiﬁcant decline in sectoral total factor productivity as capital inﬂows are misallocated toward ﬁrms that have higher net worth but are not necessarily more productive. We show that similar trends in dispersion and productivity losses are observed in Italy and Portugal but not in Germany, France, and Norway.
We consider a two country growth model with international capital markets. These markets fund capital investment in both countries, and operate subject to a costly state verification (CSV) problem. Investors in each country require some external finance, but also provide internal finance, which mitigates the CSV problem. When two identical (except for their initial capital stocks) economies are closed, they necessarily converge monotonically to the same steady state output level. Unrestricted international financial trade precludes otherwise identical economies from converging, and poor countries are necessarily net lenders to rich countries. Oscillation in real activity and international capital flows can occur.