BILKENT UNIVERSITY
Department of Economics
Fall 2001
A. Erinç Yeldan
Office:
FEASS 102 / 117
Office
Hours: Mon
Tel.
1659 (off)
e-mail.
YELDANE@BILKENT.EDU.TR
Note: There is also a web site for this course at: http://www.bilkent.edu.tr/~yeldane/Ec453Bilkent.htm
“I don’t really live in the actual world”
Bob
Dylan.
"The challenge isn't to find occult links
between Debussy and the Templars.
Everybody does that. The problem
is to find occult links between, for example, cabbala and the spark plugs of a
car.(...) Any fact becomes important when it's connected to
another. The connection changes the
perspective".
Umberto Eco, Foucault's Pendulum. P.314.
I
will deal mainly with the new growth theory and development macroeconomics in
this course. We will be mostly concerned
with the determinants of the wealth of nations and also the appropriate
national policies to achieve sustained and stable growth. We will regard the economic machine being in
motion towards its long run (steady state) equilibrium, in all its giant
complexity with many interrelated markets and different agents, classes and
institutions. Four sets of issues will
be addressed: we will,
(i)
examine the recent
evidence on the stylized facts and empirical regularities of economic growth
across nations;
(ii)
study traditional models
of growth which were designed to explain these facts through various exogeneity
assumptions; and focus on the interlinkages between growth and distribution as
envisaged through alternative paradigms;
(iii)
study the necessary
ingredients of endogenous sources of growth and look at the seminal endogenous
growth models; focusing, in particular, on the role of technological change and
the market structure;
(iv)
change gears towards
the end of the course, and look into issues of stabilization and macroeconomic
policy in an open developing country within the context of global world
economy.
Grading
will be based upon: (i) One midterm (40%) (November
15, Thursday) (ii) a Final Exam (40%); (iii) a take home exam (10%) upon
which you will work during the finals’ week; (iv) finite number of homeworks
and effective classroom participation (10%).
READING LIST
Selected chapters from the following texts will be followed closely:
David Weil, Economic Growth, forthcoming.
Jones, Charles (1998) Introduction to Economic Growth,
Agenor, Pierre-Richard (2000) The Economics of Adjustment and Growth,
Academic Press
In addition we will discuss all the
papers listed below (except marked as optional) in class. This is not
an exhaustible list of the papers in the subject area, though it should be
useful enough for a head start.
All
the course material is to be put in reserve of the Bilkent Library system. It is your
responsibility to make your own copies, if necessary.
We start with economists’ observations on empirical regularities of growth and the “development facts”. Then we will build upon a simple growth model, linking issues of technology, savings, accumulation, growth and distribution to highlight the importance of initial hypotheses and the building blocks.
Weil, op. cit. Chps 1 & 2.
Jones (1998) op. cit. Chp 1
Jovanovic, Boyan (2000) “Growth
theory” NBER Working Papers, No. W7468,
January.
Parente, S.L. & E.
Prescott (1993) “Changes in the Wealth of Nations” Federal Reserve Bank of Minneapolis Quarterly Review Spring.
Baldwin, R. E. and P. Martin
(1999) “Two Waves of Globalization: Superficial Similarities, Fundamental
Differences” NBER Working Paper, No.
W6904, January.
Kenny, Charles and David
Williams (2001) “What Do We Know About Economic Growth? Or, Why Don’t We Know
Very Much?” World Development, 29(1):
1-22.
Neoclassical Growth (with exogenous
saving rates)
The neoclassical growth model is based on optimization behavior of consumers and producers as summarized with the marginality principle. It posits a “neoclassical” production function between capital and labor, and investigates the transitional dynamics of an essentially “savings-driven” economy. Yet, the long run (steady state) equilibrium is left unexplained. Its main feature is that distribution is primarily determined by technology, or that, growth process is resolved prior to distribution. The major implication of neoclassical growth is that, subject to certain hypotheses, per capita income levels across countries should converge as they approach to their respective steady states.
Weil, op. cit. Chp 3
Jones (1998) op. cit. Chp 2
Solow, R.M. (1956) “A
Contribution to the Theory of Economic Growth” Quarterly Journal of Economics 70(1): 65-94.
Neoclassical Growth with Inter-temporal
Optimization (optional)
The exogeneity of savings in the neoclassical model was relaxed with the hypothesis of the so-called Ramsey model of optimal consumption choice (consumption smoothing). The following texts discuss the features of neoclassical model under inter-temporal optimization. The essence of the model together with its long run implications, however, remains unchanged.
(o) Barro, R.J. & X.
Sala-i Martin (1995) Economic Growth,
(o) Cass, D. (1965) “Optimum
Growth in an Aggregative Model of Capital Accumulation” Review of Economic Studies, 32(3): 233-240.
(o) Koopmans, T.C. (1965) “On
the Concept of Optimum Growth” in The
Econometric Approach to Development Planning,
(o) Ramsey, F.P. (1928) “A
Mathematical Theory of Savings” Economic
Journal, 38: 543-559.
Once upon a time the Kingdom of Solowia was gripped by a great debate: “this is a growing economy, but we can grow faster”…So the King appointed a task force under the leadership of the Vezir, Oiko, to study the facts of economic life in Solowia, and to find the optimal investment rule. Oiko was heard to say,”Forget grand optimality in terms of extremums, derivatives, Lagrangeans, and Hamiltonians. Solowians are a simple people. We need a simple policy rule”.
Here, we will seek for the “optimal” rate of savings and accumulation in a neoclassical economy, and analyze the features of the “golden rule of accumulation” together with the golden age (of capital, that is).
Phelps, E. (1961) “The Golden
Rule of Capital Accumulation: A Fable for Growthmen” American Economic Review 51(4): 638-643.
The following
reading visits the same idea from the perspective of social classes:
Thompson, Frank (1998) “Golden
Age vs. Golden Rule: Capitalists vs. Workers in Growth Theory” Paper presented
at the URPE meetings in
Convergence Controversies
(Optional
Convergence across nations, as one of the major implications of the traditional neoclassical model, has been put to test in many papers. Below is a non-exhaustive, yet suggestive, list of what had been said thus far, for those of you who are interested in more readings in this area.
(o) Barro, R. and S.X..Martin
(1995) “Convergence Across States and Regions”, Brookings Papers on Economic Activity, 1: 107-182.
(o) Barro, R.J. & X.
Sala-i Martin (1995) Economic Growth,
(o) Mankiw, N.G., D. Romer & D.N.
Weil (1992) “A Contribution to The Empirics of Economic Growth” Quarterly Journal of Economics May,
107(2): 407-437.
(o) Bernanke, Ben and Refet Gurkaynak
(2001) “Is Growth Exogenous? Taking Mankiw, Romer and Weil Seriously” NBER Working Papers, No. W8365, July.
(o) Quah, D (1996) “
(o) Schmitz, A.J. (1993)
“Early Progress on the ‘Problem of Economic Development’” Federal Reserve Bank of
(o) Krugman P. (1994) “The
Myth of Asia’s Miracle” Foreign Affairs
November-December: 62-78.
(o) Sachs, J. & A.M. Warner (1995)
“Economic Convergence and Economic Policies” NBER Working Papers, No. 5039, February.
Ricardian Theory
of Growth and Income Distribution
The basic characteristic of the Ricardian growth models is that distribution and growth processes are resolved simultaneously. Rather than assuming a production functional, Neo-Ricardians posit an independent investment function, and seek out long run equilibrium in terms of changing class shares, to attain a balance between aggregate savings and investment.
Kaldor, N. (1956) “Alternative
Theories of Distribution”, Review of
Economic Studies 23: 34-100.
Pasinetti, L. (1961) “Rate of
Profit and Income Distribution in Relation to the Rate of Economic Growth” Review of Economic Studies 29: 267-279.
Marxian Growth
The two excerpts
below should give a basic understanding of the distinguishing principles of
Marxian growth.
(o) Harris, D. (1978) Capital Accumulation and Income Distribution
Chp 3.
Faced with many of the shortcomings of the traditional models of exogenous growth, research has focused on the determinants of growth as can be explained within the context of the economic machine. Two major shortcomings of the traditional neoclassical model were: first, the neoclassical model used to leave technological change unexplained; and second, culminating empirical evidence suggested that long run rates of growth are sensitive to economic policies pursued by the governments, and the traditional model failed to capture much of this phenomenon.
We will start with the underlying ingredients of endogenous growth and synthesize the common methods used to endogenize the standard model.
Sala-i Martin, X. (1990)
“Lecture Notes on Economic Growth (I): Introduction to the Literature and
Neoclassical Models” NBER Working Paper
No 3563, December.
Solow, R. (1994) “Perspectives
on Growth Theory” Journal of Economic
Perspectives 8(1): 45-54.
Pack, H. (1994) “Endogenous
Growth Theory: Intellectual Appeal and Empirical Shortcomings” Journal of Economic Perspectives 8(1):
55-71.
Romer, P. (1994) “The Origins
of Endogenous Growth” The Journal of
Economic Perspectives, Winter, 8(1): 3-22.
(o) Sala-i Martin X. (1990)
“Lecture Notes on Economic Growth (II): Five Prototype Models of Endogenous
Growth” NBER Working Paper, No 3564,
December.
One strand of endogenous growth theory relies on externalities and on the nature of technology which enables non-diminishing returns to the cumulative factor, capital.
Jones Chp 3: pp. 47-56.
Jones, Chp 8.
Rebelo, S. (1991) “Long-Run
Policy Analysis and Long-Run Growth” Journal
of Political Economy 99: 500-521.
Barro, R.J. (1990) “Government
Spending in a Simple Model of Endogenous Growth” Journal of Political Economy, October, Part II, 98(5): S103-S125.
Lucas, R.E.J (1988) “On the
Mechanics of Economic Development” Journal
of Monetary Economics, 22(1): 3-42.
R&D-driven models of endogenous growth are based on three premises: (i) technological development is the ultimate source of growth; (ii) advances in technology occurs not because of chance or birth of Einsteins at random rate, but rather arises because of purposeful actions of optimizing agents in a market setting; (iii) technology is a different good than other economic gods.
Two important
implications of the R&D-driven endogenous growth paradigm are that,
firstly, the above three premises can not be sustained in a perfectly
competitive market setting with marginal cost price taking; and secondly,
changes in policy have permanent effects on the long run rate of growth. This latter implication is criticized heavily
by Jones, an example of which is provided in Jones (1997) below.
Romer,
P. (1992) “Two Strategies for Economic Development: Using Ideas and Producing
Ideas” Proceedings of the World Bank
Annual Conference on Development Economics, IBRD: 63-92. (See also
comments).
Jones Chp 4 and 5
Romer, P. (1990) “Endogenous
Technological Change” Journal of
Political Economy 98(5): S71-S102. (You
CAN read this paper: skip math, if necessary)
The following is a serious critique of the hypotheses implicit in the R&D-Based Growth literature:
Jones, C.I. (1997) “The
Upcoming Slowdown in US Economic Growth” NBER
Working Paper No 6284.
Much energy has been put into the debate on the links between openness and growth. Empirical studies from an orthodox perspective have often claimed a negative relationship between protection and growth. However, this literature arguably suffers from serious deficiencies in terms of its analytical and conceptual propositions. The Weil chapter below, gives a balanced view of the analytics of these arguments, while Rodrik draws a distinction between microeconomic distortions (which would not necessarily lead to economic instability, nor warrant reductions in the long term growth) and unsustainable macroeconomic policies.
Weil Chapters 6 and 10.
Rodrik, Dani (1996)
“Understanding Economic Policy Reform” Journal
of Economic Literature, March, vol.34: 9-41.
Rodrik, Dani (1992) “The
Limits of Trade Policy Reform in Developing Countries” Journal of Economic Perspectives 6(1): 87-105, Winter.
On the other hand, there is strong evidence that openness stimulates externalities: In fact, one of the implications of R&D-driven growth is that size matters. Thus, countries which are open to foreign trade can have access to the stock of foreign R&D, crystallized in imports of machinery.
Coe, D. T., E. Helpman and
A.W. Hoffmaister (1997) “North-South R&D Spillovers” European Economic Review, January, 107:134-149.
Now we turn our attention to issues of macroeconomic development and
design of stabilization policies. First, we will analyze the impact of financial
liberalization and the short term capital flows in an open developing economy
given the recent financial crisis episodes in
Adelman, I. And
Mkandawire, Thandika (2001) “The
Need to Rethink Development Economics”, Unite Nations Research Institute for
Social Development,
Levitt, K. Polanyi (2001) “Reclaiming
the Right to Development” Paper presented at the UNRISD Conference on “the Need
to Re-Think Development Economics” Cape Town, September, 2001.
Rodrik, Dani (2001) “The
Global Governance of Trade As If Development Really Mattered”
Grabel, Ilene (1996) “Marketing
the
Easterly, William (2001) “The
Lost Decades: Developing Countries’ Stagnation in Spite of Policy Reform” The
World Bank, mimeo.
On the detrimental consequences of speculative-led growth and free mobility of short term capital:
Adelman, Irma (ed) Special
Issue on Financial Liberalziation in World
Development 28(6):1053-1142.
Akyuz, Y. and A. Cornford
(1999) “Capital Flows to Developing Countries and the Reform of The
International Financial System” UNCTAD
Discussion Paper No 143, November.
Mishkin, F.S. (1999) “Global
Financial Instability: Framework, Events, Issues” Journal of Economic Perspectives, Fall, 13(4): 3-20.
Calvo, G., L. Leiderman and C.
Reinhart (1996) “Inflows of Capital to Developing Countries” Journal of Economic Perspectives,
Spring, 10(2):123-140.
Singh, A. (1999) “Trade,
Technology, Institutions, and Social Norms: A Perspective on the Determinants
of Income Inequality” WIDER Project Paper,
Edwards, S. (1999) “How
Effective Are Capital Controls” Journal
of Economic Perspectives, Fall, 13(4): 65-84.
Agenor,
P. Richard (2000) “Capital Inflows: Causes and Policy Responses” Chp. 6 in The Economics of Adjustment and Growth.
Next, we study the effectiveness of policies towards controlling moderate inflation in an open economy framework
Patinkin, D. (1993) “
Calvo, G. (1991) “The Perils
of Stabilization” IMF Staff Papers,
December, 38(4): 921-926.
Kaminsky, Graciela and Carmen
Reinhart (1999) “The Twin Crises: Tha Causes of banking and Balance of Payments
Problems” American Economic Review 89 (June): 473-500.
Kaminsky, Graciela, Saul
Lizondo and Carmen Reinhart (1998) “Leading Indicators of Currency Crises” IMF Staff Papers, 45 (March): 1-48.
Agenor,
P. Richard (2000) “Currency Crises and financial Volatility” Chp 7 in The Economics of Adjustment and Growth.
Contrasting Views on the Turkish 2000-Crisis:
Selcuk, Faruk and Ahmet Ertugrul
(2001) “A Brief Account of the Turksih Economy: 1980-2000” Russian and East European Finance and Trade” forthcoming.
Alper, Emre “The Turkish
Liquidity Crisis of 2000: What Went Wrong” Russian
and East European Finance and Trade” forthcoming.
Uygur, Ercan (2001) “Krizden
Krize Turkiye: 2000 Kasim ve 2001 Subat Krizleri” Turkiye Ekonomi Kurumu
tartisma Metni, No 2001/01.
Boratav, Korkut (2001) “2000-2001
Krizinde Sermaye Hareketleri” Iktisat, Isletme ve Finans” Eylul.
Yeldan, Erinc “On the IMF
Directed Disinflation Program in
Finally, this is a nice survey article to wrap-up:
Corden, M. (1987) “The
Relevance for Developing Countries of Recent Developments in Macroeconomic
Theory” World Bank Research Observer,
2(2): 171-187.