Research Papers in Economics, Department of Economics, Stockholm University
Distortions in the Neoclassical Growth Model: A Cross-Country Analysis
Abstract: This paper investigates the properties of distortions that
manifest themselves as wedges in the equilibrium conditions of the
neoclassical growth model across a sample of OECD countries for the
1970-2011 period. The quantitative relevance of each wedge and its
robustness in generating fluctuations in macroeconomic aggregates is
assessed. The eciency wedge proves to be determinant in enabling models to
replicate movements in output and investment, while the labor wedge is
important to predict uctuations in hours worked. Modeling distortions to
the savings decision holds little quantitative or qualitative relevance.
Also, investment seems to be the hardest aggregate to replicate, as
prediction errors concerning output and hours worked are typically one
order of magnitude smaller. These conclusions are statistically significant
across the countries in the sample and are not limited to output drops.
Finally, the geographical distance between countries and their degree of
openness to trade are shown to contain information with regard to the
wedges, stressing the importance of international mechanisms of
transmission between distortions to the equilibrium conditions of the
neoclassical growth model.
Keywords: Business cycle accounting; frictions; economic fluctuations; (follow links to similar papers)
JEL-Codes: E27; E30; E32; E37; (follow links to similar papers)
56 pages, September 12, 2013
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