graduate_macro_notes1

graduate_macro_notes1 - Notes on Graduate Macroeconomics...

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Notes on Graduate Macroeconomics: Part 1. Stylized Facts of Growth and Business Cycles Yongsung Chang January 12, 2011 Two big questions in macroeconomics: Growth and Business Cycles Growth: long-run trend, sustained growth in output, consumption, investment. Business Cycles: short-run fluctuations around the trend. 1 Economic Growth Only recently, economic growth is noticeable. Annual growth is negli- gible before Industrial Revolution. Growth rates differ widely across countries. Catch-up among OECD countries. Successful growth among East Asian countries. Table 1: Economic Growth Leading Country Period per capita GDP growth Netherland 1700-1785 0 U.K. 1785-1820 0.5 % U.K. 1820-1890 1.4 % U.S. 1890- 2 % 1
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Many countries do not even trigger a economic growth for an extended period of time (poverty trap). 1.1 Kaldor’s ”stylized facts” on growth 1. Output per worker shows continuing growth “with no tendency for a falling rate of growth of productivity.” 2. Capital per worker shows continuing growth. 3. The rate of return on capital is steady. 4. The capital-output ratio is steady. 5. Labor and capital receive constant shares of total income. 6. There are wide differences in the rate of growth of productivity across countries. 1 - 5 Elements of neo-classical growth theory. So called balanced growth path. While the economy is growing its component shares remain. Business cycle theory shares this view. For developing countries labor income share show some trends. Some other stylized features on growth (Romer) In cross-section, mean growth rate shows no variation with the level of per capita income Growth in the volume of trade is positively correlated with growth in output. Population growth rates are negatively correlated with the level of income. The rate of growth of factor inputs is not large enough to explain the rate of growth of output: that is, growth accounting always finds a residual. Both skilled and unskilled workers tend to migrate toward high income countries. 2
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1.2 Growth Theories Exogenous Growth Theory: Ramsey-Cass-Koopman (optimization), Solow (fixed savings rate) Endogenous Growth Theory: Innovation, Human Capital 2 Business Cycles Since 1947 Y grows 3 % annual, Y/N 2% It takes three D’s to be a recession: 1. Duration 2. Depth 3. Diffusion Since 1947, 11 recessions in the U.S. (two consecutive negative output growth). Average duration of recession 10 months (avg. duration of expansion 57 months).
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