Fluctuations in convex models of endogenous growth, I: Growth effects

Larry E. Jones, Rodolfo E. Manuelli, Henry E. Siu, Ennio Stacchetti

Research output: Contribution to journalArticlepeer-review

24 Scopus citations

Abstract

Is there a trade-off between fluctuations and growth? The empirical evidence is mixed, with some studies finding a positive relationship, while others find a negative one. Our objectives are to understand how fundamental uncertainty affects the long run growth rate and to identify important factors determining this relationship in a convex endogenous growth model. Qualitatively, we show that the relationship between volatility in fundamentals (or policies) and mean growth can be either positive or negative. The curvature of the utility function is a key parameter that determines the sign of the relationship. Quantitatively, an increase in uncertainty always increases the growth rate in our calibrated models. Though the changes we find are nontrivial, they are not large enough by themselves to account for the large differences in growth rates observed in the data. We also find that differences in the curvature of preferences have very substantial effects on the estimated variability of stationary objects like the consumption-output ratio and hours worked. For this reason, we expect that the models considered in this paper will provide the basis of sharp estimates of the curvature parameter.

Original languageEnglish (US)
Pages (from-to)780-804
Number of pages25
JournalReview of Economic Dynamics
Volume8
Issue number4
DOIs
StatePublished - Oct 2005

Keywords

  • Growth
  • Human capital investment
  • Uncertainty

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