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Growth Outside The Stable Path: Lessons From The European Reconstruction

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  • Francisco Alvarez-Cuadrado

Abstract

This paper exploits a natural experiment, the large destruction of capital in continental Europe during World War II, to characterize the transitional dynamics of an economy that begins with a capital stock below its steady state level. We use these regularities as a benchmark to discriminate among competing growth specifications. A model that combines non-separabilities in preferences with a technology that restricts the degree of substitutability between inputs outperforms the widely used AK and Cobb-Douglas specifications with time-separable preferences. Our results suggest that policy evaluations based in growth models that overlook non-separabilities in preferences or impose strong restrictions on the technological structure might be grossly misleading.

Suggested Citation

  • Francisco Alvarez-Cuadrado, 2006. "Growth Outside The Stable Path: Lessons From The European Reconstruction," Departmental Working Papers 2006-02, McGill University, Department of Economics.
    • Handle: RePEc:mcl:mclwop:2006-02
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    Cited by:

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    2. Travers Barclay Child & Elena Nikolova, 2017. "War and Social Attitudes," UCL SSEES Economics and Business working paper series 2017-5, UCL School of Slavonic and East European Studies (SSEES).
    3. Simon Gilchrist & John C. Williams, 2001. "Transition dynamics in vintage capital models: explaining the postwar catch-up of Germany and Japan," Finance and Economics Discussion Series 2001-07, Board of Governors of the Federal Reserve System (U.S.).
    4. Child, Travers Barclay & Nikolova, Elena, 2018. "War and Social Attitudes," GLO Discussion Paper Series 279, Global Labor Organization (GLO).
    5. Talan B. Işcan, 2009. "Engel and Baumol: How much can they explain the rise of service employment in the United States?," Working Papers daleconwp2009-03, Dalhousie University, Department of Economics.
    6. Simone Valente, 2009. "International status seeking, trade, and growth leadership," Canadian Journal of Economics, Canadian Economics Association, vol. 42(2), pages 554-589, May.
    7. Schäfer, Andreas & Valente, Simone, 2011. "Habit Formation, Dynastic Altruism, And Population Dynamics," Macroeconomic Dynamics, Cambridge University Press, vol. 15(3), pages 365-397, June.
    8. Alonso-Carrera, Jaime & Bouché, Stéphane & de Miguel, Carlos, 2021. "Revisiting the process of aggregate growth recovery after a capital destruction," Journal of Macroeconomics, Elsevier, vol. 68(C).
    9. Valente, Simone, 2011. "Endogenous Growth, Backstop Technology Adoption, And Optimal Jumps," Macroeconomic Dynamics, Cambridge University Press, vol. 15(3), pages 293-325, June.
    10. Alvarez-Cuadrado, Francisco & Pintea, Mihaela I., 2009. "A quantitative exploration of the Golden Age of European growth," Journal of Economic Dynamics and Control, Elsevier, vol. 33(7), pages 1437-1450, July.
    11. Travers Barclay Child & Elena Nikolova, 2020. "War and social attitudes," Conflict Management and Peace Science, Peace Science Society (International), vol. 37(2), pages 152-171, March.

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    More about this item

    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General

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