Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 299: Fuel for Economic Growth?

Johan Gars () and Conny Olovsson ()
Additional contact information
Johan Gars: GEDB, Royal Swedish Academy of Sciences, Postal: 104 05 Stockholm, Sweden
Conny Olovsson: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: We set up an endogenous growth model in which the efficiency of both capital and fossil energy can be improved, whereas the efficiency of one alternative energy source is limited. With capital and energy as complements, there exist two steady states: one stagnant where energy is fully derived from the alternative energy source, and one with balanced growth where energy is fully sourced from fossil fuel. Heterogeneity in initial TFP levels can generate the Great Divergence. The demand for fossil fuel in technologically advanced countries drives up its price and makes fossil fuel too costly in less advanced countries that choose the alternative and stagnant energy input.

Keywords: Growth; Malthusian stagnation; Industrial Revolution; Great Divergence; Technological progress

JEL-codes: O11; O14; O33; O41; O50

53 pages, May 1, 2015

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