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Accounting for development through investment prices

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  • Armenter, Roc
  • Lahiri, Amartya

Abstract

Cross-country income gaps are large in the data. Can observed investment prices account for these gaps? Our model adds an extensive margin to the neoclassical growth model by allowing for entry of firms. When combined with a “returns to variety” effect, our model provides an amplification mechanism from investment prices to output. Using cross-country data on relative investment prices, the model can explain up to 5 to 6-fold income differences between the richest and poorest countries in our sample while simultaneously reducing the implied cross-country TFP differences.

Suggested Citation

  • Armenter, Roc & Lahiri, Amartya, 2012. "Accounting for development through investment prices," Journal of Monetary Economics, Elsevier, vol. 59(6), pages 550-564.
    • Handle: RePEc:eee:moneco:v:59:y:2012:i:6:p:550-564
    DOI: 10.1016/j.jmoneco.2012.06.009
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    References listed on IDEAS

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    Cited by:

    1. Piyusha Mutreja & B. Ravikumar & Raymond Riezman & Michael Sposi, 2015. "Price Equalization Does Not Imply Free Trade," Review, Federal Reserve Bank of St. Louis, vol. 97(4), pages 323-339.
    2. Mutreja, Piyusha & Ravikumar, B. & Riezman, Raymond & Sposi, Michael, 2014. "Price equalization, trade flows, and barriers to trade," European Economic Review, Elsevier, vol. 70(C), pages 383-398.
    3. Alok Johri & Md Mahbubur Rahman, 2022. "The Rise and Fall of India's Relative Investment Price: A Tale of Policy Error and Reform," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(1), pages 146-178, January.
    4. Weicheng Lian & Natalija Novta & Evgenia Pugacheva & Yannick Timmer & Petia Topalova, 2020. "The Price of Capital Goods: A Driver of Investment Under Threat," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(3), pages 509-549, September.
    5. Piyusha Mutreja & Michael Sposi & B. Ravikumar, 2018. "Capital Goods Trade, Relative Prices and Economic Development," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 27, pages 101-122, January.
    6. Grobovšek Jan, 2018. "Development accounting with intermediate goods," The B.E. Journal of Macroeconomics, De Gruyter, vol. 18(1), pages 1-27, January.
    7. Anthony Landry, 2018. "Capital-Goods Imports and U.S. Growth," 2018 Meeting Papers 208, Society for Economic Dynamics.
    8. Jessica Madariaga & Anton Bekkerman, 2020. "The Impact of Trade Openness on Relative Equipment Prices: Lessons from Latin America," Economica, London School of Economics and Political Science, vol. 87(348), pages 938-984, October.
    9. Restuccia, Diego, 2014. "Barriers to capital accumulation in a model of technology adoption and schooling," Journal of Economic Dynamics and Control, Elsevier, vol. 44(C), pages 81-91.
    10. Mehdi Senouci, 2014. "The endogenous direction of technological change in a discrete-time Ramsey model," Working Papers hal-01206029, HAL.
    11. Areendam Chanda & Beatrice Farkas, 2012. "Appropriate Technology, Human Capital and Development Accounting," Departmental Working Papers 2012-03, Department of Economics, Louisiana State University.
    12. Michael Sposi, 2015. "Navigating the Structure of the Global Economy," Annual Report, Globalization and Monetary Policy Institute, Federal Reserve Bank of Dallas, pages 10-17.

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