Lutz G. Arnold

Growth, Welfare, and Trade in an Integrated Model of Human-Capital Accumulation and Research

R&D-based models of growth predict an unrealistic degree of responsiveness of long-run growth rates to policy changes. The present paper “exogenizes” the equilibrium growth rate in the Grossman-Helpman model by endogenizing human capital along the lines proposed by Uzawa and Lucas: the pace of long-run growth is unaffected by R&D subsidies, flat-rate taxes, basic research, and—in highly developed countries—by cross-border knowledge spillovers and international trade. A complete dynamic analysis is performed.

Stability of the market equilibrium in Romer's model of endogenous technological change: A complete characterization*

Despite much interest in the dynamic behavior of endogenous growth models, the dynamics of probably the most influential endogenous growth model, Romers celebrated model of Endogenous Technological Change, has not yet been fully analyzed. This gap in the literature is filled by the present paper. It is shown that a unique and monotonic growth path converges to the steady state. No indeterminacies can arise, as already shown by Benhabib, Perli and Xie. Instability and cyclical behavior are likewise ruled out—the equilibrium growth path is “well-behaved.”

Business cycle theory

Business cycle theory is a broad and disparate field. Different schools of thought offer alternative explanations for cycles, often using different mathematical methods. This book provides academics and graduate students of economics with a compact and accessible exposition of business cycle theory since Keynes. The author places the main theories -- Keynesian economics, monetarism, new classical economics, the real business cycles theory, and new Keynesian economics -- in an historical context by presenting them in the chronological order of their appearance and highlighting their differences and commonalities. He minimizes the necessary mathematical prerequisites by using a unifying mathematical approach: stochastic second-order difference equations, which is explained in detail. Throughout the book, the international dimension of business cycles is acknowledged. The theoretical results obtained are set alongside empirical facts in separate boxes. Each chapter finishes with a set of problems designed to deepen the readers understanding of the theories presented, and further reading sections which provide access to related material.

On the growth effects of North-South trade: the role of labor market flexibility

This paper examines the impact of intensified North–South intra-industry trade from a growth theoretic perspective. It incorporates unemployment into Helpman’s [Econometrica 61 (1993) 1247] model of North–South trade. We assume that those Northern workers who lose their jobs due to imitation remain unemployed for a given (expected) length of time, so that imitation in the South causes frictional unemployment. It is shown that the shape of the relation between the (exogenous) rate of imitation and the (endogenous) steady-state growth rate depends on the degree of labor market flexibility, as measured by the outflow rate from unemployment. It is monotonically increasing for high outflow rates, hump-shaped for intermediate outflow rates, and monotonically decreasing for low outflow rates. The realization of the potential growth gains from trade thus presupposes labor market flexibility, and the model is capable of accounting qualitatively for the divergent growth performances in the US and Europe in the recent past.

Endogenous growth with physical capital, human capital and product variety: A comment

Funke and Strulik (2000, European Economic Review 44, 491–515) propose an endogenous growth model with physical capital, human capital and R&D. This comment provides a rigorous proof of their Proposition 1, which characterizes the models long-run growth equilibrium.

On the Effectiveness of Growth-Enhancing Policies in a Model of Growth Without Scale Effects

Abstract Standard R&D growth models have two disturbing properties: the presence of scale effects (i.e., the prediction that larger economies grow faster) and the implication that there is a multitude of growth-enhancing policies. Recent models of growth without scale effects, such as Segerstroms (1998), not only remove the counterfactual scale effect, but also imply that the growth rate does not react to any kind of economic policy. They share a different disturbing property, however: economic growth depends positively on population growth, and the economy cannot grow in the absence of population growth. The present paper integrates human capital accumulation into Segerstroms (1998) model of growth without scale effects. Consistent with many empirical studies, growth is positively related not to population growth, but to investment in human capital. And there is one way to accelerate growth: subsidizing education.

Financial regimes, capital structure, and growth

Abstract We develop a growth model with endogenous technological progress in which the financial sector plays an explicit role. This allows us to consider the role of different financial regimes in the growth process. We contrast a bank-dominated financial system with a market-dominated system. In the former a financial intermediary (a bank) is able to solve informational problems; at a cost, however. There is learning by doing (LBD) in the banking sector. We investigate circumstances under which each of the two regimes emerges. History matters and the emergence of the low-growth regime is feasible. In a second step, we allow an endogenous capital structure choice of firms and analyze the evolution of the financial system and capital structure over time.

Growth in stages

Existing North–South growth models generally ignore the possibility that the South becomes an innovating high-wage country. The present paper presents an analytically tractable North–South growth model in which the North innovates all the time, while the South is at first engaged in imitation and potentially starts to innovate too, later on. Three interesting results emerge from the analysis. First, a perfect foresight growth equilibrium may fail to exist. Second, there may be global indeterminacy in that both convergence to the steady state of the regime with imitation in the South and switching to the regime with innovation in the South represent perfect foresight equilibria. Third, technology policies in the South may have hysteresis effects: a temporary policy may lead the South permanently from imitation-driven to innovation-driven growth.

COMPARATIVE STATICS AND DYNAMICS OF THE ROMER R&D GROWTH MODEL WITH QUALITY UPGRADING

This paper replaces increasing product variety with quality upgrading in the Romer model [Romer, Paul M., Journal of Political Economy 98 (1990), S71–S102]. We show that the range of parameters for which a steady state exists can be divided into two subspaces with well-behaved comparative statics and saddle-point dynamics in one subspace, but with “perverse” comparative-statics properties and either equilibrium indeterminacy or instability in the other subspace. These results for the closed economy can also be used to characterize the dynamics of the M-country open-economy version of the model.

Single-name Credit Risk, Portfolio Risk and Credit Rationing

This paper introduces non-diversifiable risk in the Stiglitz-Weiss adverse selection model, so that an increase in the average riskiness of the borrower pool causes higher portfolio risk. This opens up the possibility of equilibrium credit rationing. Comparative statics analysis shows that an increase in risk aversion turns a two-price equilibrium into a rationing equilibrium. A two-price equilibrium is more inefficient than a rationing equilibrium, and a usury law that rules out the higher of the two interest rates can be welfare-improving. Contrary to the common result, the equilibrium may be characterized by over-investment.