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Econ 8818 MATHEMATICAL ECONOMICS - DYNAMICS

Fall 1999

Instructor: Professor Frank S.T. Hsiao Office: Economics Building 107, Office Phone: 492-7908

This course will be offered as Independent Studies in Fall 1999 or will be offered again in Spring 2000. Please talk with the instructor.

Objectives: The contents of the course vary over time, depending on the research interests of the students and the instructor. In this semester, the purpose of this course is to provide a comprehensive review of economic growth in the Jong run. Emphasis on theoretical model buildings, mathematical techniques, and empirical applications. Our emphasis is on endogenous economic growth. There will be readings of current papers on the related topics, as suggested below. Major applications will be directed to growth of OECD and East Asian Newly Developing Countries (ANICS)

In the past, topics included Calculus of Variations, Optimal Control Theory, Dynamic Programming, Theory of Optimal Economic Growth, Business Cycle Theory, International Policy Coordination, Theory of Differential Games, Theory of Rational Expectation, Theory of Market Disequilibrium, Chaotic Dynamics and Persistent Oscillations, Dynamic Programming and Macrodynamics.

A recent survey of growth theory and empirical evidence can be found in "The New Growth Evidence," Jonathan Temple, Journal of Economic Literature, March 1999, pp. 112-156. Read this paper at the beginning and the end of the semester. A new journal, the Journal of Economic Growth is now devoted to all aspects of theories and empirics of economic growth (unfortunately, the journal is placed in-the Business Library).

Professor Temple maintains an extensive "Economic Growth Resources" at the Oxford University website, http://www.nuff.ox.ac.uk/Economics/Growth/, which contains links to economic growth data sets, journals, institutions, working papers, and references, related to the topics on economic growth. Professor Chad Jones of Stanford University has a shorter website at http://www.stanford.edu/-chadj/growth.html. Many of the references listed below are selected from above sources. Bill Goffe's website on Resources for Economists on the Internet, http://www.rfe.wustl.edu/sc.html, is also a great place to visit. In addition, the data link at Harvard, http://www.economics.harvard.edu/links.html, is also useful. Please acquaint yourself with these websites at the beginning of the semester.

As we may see from the reading list for the class below, the study of economic growth is probably the hottest field in economics today. After all, the ultimate goal of economic science is to improve the material welfare of people or individuals in developed and developing countries, and this is reflected in economic growth. We may say that all other fields in economics "converge" to economic growth.

Textbooks Required:

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Optional: Grossman, G.M. and E. Helpman, Innovation and Growth in the Global Economy, The MIT Press, 1997

Barro, R.J. and X. Sala-i-Martin: Economic Growth, McGraw-Hill, 1995.

Prerequisites: Econ 4808, Introduction to Mathematical Economics, we assume that students have completed Chapters 3 to 12 of A. C. Chiang: Fundamental Methods of Mathematical Economics, 3rd ed., McGraw-Hill, 1984. Or Chapter 1 to 1 I of M. Klein, Mathematical Methods for Economics, Addison-Wesley, 1997. In addition, Econ. 6808: Quantitative Methods or its equivalence is required.

General References:

• Aghion, P. and Howitt, P. (1998), Endogenous Growth Theory, MIT Press. • Anderson, T.M. and K.O. Moene (1993), Endogenous Growth, Blackwell. • Azariadis, C. (1993), Intertemporal Macroeconomics, Blackwell. • Basu, K. (1997), Analytical Development Economics, The Less Developed Economy revisited, MIT

Press.

• Chiang, A. (1984), Fundamental Methods of Mathematical Economics, 3rd ed. • Chiang, A. (1992), Elements of Dynamic Optimization, McGraw-Hill. • Hsiao, F. S.T. (1996), Lecture Notes on Economic Dynamics. 16 chapters.

• Kamien, M.I. and N.L. Schwarts (1991), Dynamic Optimization, 2nd ed., North Holland. • Levy, A. (1992), Economic Dynamics: Applications of Difference Equations, Differential Equations,

and Optimal Control, Avebury. • Romar, D. (1996), Advanced Macroeconomics, McGraw-Hill. • Turnovsky, SJ. (1995), Methods of Macrodynamics, MIT Press. Economic Growth in the Long Run,

A History of Empirical Evidence, Volumes I, II, III. Edward Elgar, Pub.

Selected Topics: I . Introduction: Why Growth? 2. Neoclassical Models 3. Endogenous Growth Models 4 . Human Capital and Growth 5. Convergence

a. Theory b. Historical Approach c. Cross Section Analysis d. Time Series Analysis e. Stochastic Models f. Trade and Convergence g. Regional Convergence)

6. Technology and Technology Transfer 7. Population and Growth 8. Trade, Openness, and Growth 9. Democracy and Growth I 0. Inequality and Growth 11. The East Asian Miracle I 2. Energy, Environment, and Growth

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References with an asterisk are minimum required readings. Topics not included here are Economic Growth and Development, Economic Fluctuations, Financial Development, Fiscal Policy, Money, Migration, Model Uncertainty, Overlapping Generation Models, Scale Effects, Social Effects, and Stock Markets, etc.

1. Introduction: Why Growth?

* Jones, Chapters 1 and 2.

*Barro and Sala-i-Matin, Chapter 1.

Barro, R. (1997), Determinants of Economic Growth: A Cross-Country Empirical Study , MIT Press.

2. Neoclassical Models

*Solow, R. M. (1956), A Contribution of the Theory of Economic Growth, Quarterly Journal of Economics, 70, Feb., 65-94.

*Solow, R. M. (1961), Note on Uzawa's Two Sector Model of Economic Growth,Review of Economic Studies, 29, Oct., 48-50.

*Uzawa, H. (1963), On a Two-Sector Model of Economic Growth, II, Review of Economic Studies , 30, June 1963, 105-18.

Harris, J.H. and M.P. Todaro, (1970), Migration, Unemployment and Development: A Two-Sector Analysis, American Economic Review, 59(1), March, 126-142.

*Hsiao, F.S.T., (1975), Factor Substitution and Stability of Two-Sector Growth Models- -Generalizations and A Synthesis, The Southern Economic Journal, 41(3) , Jan., 420-28.

---------, (1979), Relative Stability of Balanced Growth and Asymptote Criterion in Neoclassical Models, The Economic Studies Quarterly, 20(1), April, 50-59.

King, R.G. and S.T. Rebelo (1993), Traditional Dynamics and Economic Growth in the Neoclassical Model, American Economic Review, 83(4), September, 908-931.

*Barro, R.J. ( 1999), Notes on Growth Accounting, Journal of Economic growth, June. 119-137.

Hsiao, F.S.T. Lecture Notes on One-Sector Growth Model and its Extension.

Hsiao, F.S.T. Lecture Notes on Extension of One-Sector Growth Model

*Hsiao, F.S .T. Lecture Notes on Uzawa and Jones' Two-Sector Growth Models

3. Endogenous Growth Models

*Lucas, R. (1988), On the mechanics of economic development, Journal of Monetary economics, July.

*Romer, P .M. (1990), Endogenous.technological change, Journal of Political Economy, 98(5), pt 2,

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*Mankiw, N. G. , Romer, D. and Weil, D. N. (1992). A contribution to the empirics of economic growth. Quarterly Journal of Economics, 407-437.

Knight, M., Loayza, N. and Villanueva, D. (1993) . Testing the neoclassical theory of economic growth. IMF Staff Papers, 40, 512-541.

*Mankiw, N. G. (1995). The growth of nations. Brookings Papers on Economic Activity, 275-310.

Nonneman, W. and Vanhoudt, P. (1996). A further augmentation of the Solow model and the empirics of economic growth for OECD countries. Quarterly Journal of Economics, 943-953

Brumm, H. J. (1996). The human capital augmented Solow model revisited. Applied Economics Letters, 3(11), 711-714.

Vanhoudt, Patrick (1998). A fallacy in causality research on growth and capital accumulation. Economics Letters, 60(1), July, 77-81.

• Vanhoudt, Patrick (1998). A fallacy in causality research on growth and capital accumulation. Economics Letters, 60(1), July, 77-81.

Jones, C. I. (1999), Was an industrial revolution inevitable? Economic growth over the very long run. 52 pp. Available from the author's website above.

4. Human Capital and Growth

Nelson, R.R. and E.S. Phelps (1966), Investment in humans, technological diffusion, and economic growth, American Economic Review, Papers and Proceedings, 69-75.

Azariadis, C. and Drazen, A. (1990), Threshold externalities and economic development, Quarterly Journal of Economics, 501-526.

Barro, Robert J. and Lee, Jong-Wha. (1996). International measures of schooling years and schooling quality, American Economic Review, 86(2), 218-23.

Murthy, N. R. Vasudeva and Chien, I . S. (1997). The empirics of economic growth for OECD countries: some new findings . Economics Letters, 55, 425-429.

*Lucas, R. E. ( 1988). On the mechanics of economic development. Journal of Monetary Economics, 22, 3-42.

*Lucas, R. E. (1990). Why doesn't capital flow from rich to poor countries? American Economic Review, Papers and Proceedings, 92-96.

Bils, M. and Klenow, P. J. (1998). Does schooling cause growth or the other way around? NBER working paper no. 6393.

*Chiu, W. (1998). Income inequality, human capital accumulation and economic performance. Economic Journal, 108, 44-59.

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Temple, Jonathan R. W. (1999). A positive effect of human capital on growth, Economics Letters.

5. Convergence

Sa. Convergence Theory *Barro, R. J. and Sala-i-Martin, X. (1992). Convergence. Journal of Political Economy, I 00(2), 223-251.

*Mankiw, N. G., Romer, D. and Weil, D. N. (1992). A contribution to the empirics of economic growth. Quarterly Journal of Economics, 407-437.

Galor, 0. D. (1996). Convergence? Inferences from theoretical models. Economic Journal, 106, 1056-1069.

Goodfriend, Marvin and McDermott, John (1998). Industrial development and the convergence question. American Economic Review, 88(5), 1277-1289

Sb. Historical Approach * Abramovitz, M. ( 1986). Catching up, forging ahead and falling behind. Journal of Economic History, 46, 385-406.

Baumol, W. J . (1986), "Productivity Growth, Convergence, and Welfare: What the Long-Run Data Show," American Economic Review, 76, December, 1072-85.

*DeLong, J.B. (1988), "Productivity Growth, Convergence, and Welfare: Comment," American Economic Review, 78, December.

*Wolff, E.N. (1991), "Capital Formation and Productivity Convergence Over the Long Term", American Economic Review, 81(3), 569-79.

Oxley, Les and Greasley, David (1995). A time-series perspective on convergence: Australia, UL and USA since 1870. Economic Record, 71 , 259-270.

Williamson, J. (1996). Globalization, convergence, and history. Journal of Economic History, 56, 277-306, June.

Greasley, David and Oxley, Les (1998). A tale of two dominions: comparing the macroeconomic records of Australia and Canada since 1870. Economic History Review, 51, 294-318.

Greasley, David and Oxley, Les (1998). Comparing British and American economic and industrial performance 1860-1993: a time series perspective. Explorations in Economic History, 35, 171-195.

Sc. Cross-section Analysis Barro, R. J. and Sala-i-Martin, X. (1992). Convergence. Journal of Political Economy, 100(2), 223-251.

Mankiw, N. G., Romer, D. and Weil, D. N. (1992). A contribution to the empirics of economic growth. Quarterly Journal of Economics, 407-437.

*Barro, R.J. (1991 ), Economic growth in a cross section of countries, Quarterly Journal of Economics, 407-443.

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*Levine, R. and D. Renelt (1992), "A Sensitivity Analysis of Cross-Country Regressions," American Economic Review, 82(4), September, 942-63.

Durlauf, S. N. and Johnson, P. A. (1995). Multiple regimes and cross-country growth behavior. Journal of Applied Econometrics, 10, 365-384.

Durlauf, S.N. and P.A. Johnson (1995), "Multiple Regimes and Cross-Country Growth Behavior," Journal of Applied Econometrics, 10, 365-384.

Bernard, A.B. and S.N. Durlauf (1995), Convergence in International Output," Journal of Applied Econometrics, 10, 97-108.

*Caselli, F., Esquivel, G. and Lefort, F. (1996). Reopening the convergence debate: a new look at cross-country growth empirics, Journal of Economic Growth, September, 1(3), 363-90.

Galor, 0. D. (1996). Convergence? Inferences from theoretical models. Economic Journal, 106, 1056-1069.

Brumm, Harold J. (1997). Military spending, government disarray, and economic growth: a cross-country empirical analysis. Journal of Macroeconomics, 19(4), fall, 827-838.

Sd. Time Series Analysis Carlino, G. A. and Mills, L. ( 1993). Are US regional incomes converging? A time series analysis. Journal of Monetary Economics, 35(1), 65-82.

*Pesaran, M.H. and Y. Shin (1996), Cointegration and speed of convergence to equilibrium, Journal of Econometrics, 71, 117-143.

*Greasley, David and Oxley, Les. ( 1997). Time-series based tests of the convergence hypothesis: some positive results. Economics Letters, 56(2), 143-147.

*Hsiao, F.S.T. and M. W. Hsiao (1999), Falling behind but catching up in the long run--on capitalistic development of Taiwan and Korea, mimeographed paper.

Se. Stochastic Models *den Haan, W. J. (1995). Convergence in stochastic growth models: the importance of understanding why income levels differ. Journal of Monetary Economics, 35(1), 65-82.

*Islam, N. (1995). Growth empirics: a panel data approach. Quarterly Journal of Economics, 110, 1127-1170.

Caselli, F., Esquivel, G. and Lefort, F. (1996). Reopening the convergence debate: a new look at cross-country growth empirics, Journal of Economic Growth, September, 1 (3), 363-90.

*Bernard, A.B. and S.N. Durlauf (1996), Interpreting tests of the convergence hypothesis, Journal of Econometrics, 71, 161-173.

Quah, D. T. (1996). Empirics for economic growth and convergence. European Economic Review, 40, 1353-1375.

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Bianchi, M. (1997), Testing for convergence: Evidence from non-parametric multimodality tests, Journal of Applied Econometrics, 12, 393-409.

Lee, K., Pesaran, M. H. and Smith, R. (1997). Growth and convergence in a multi-country empirical stochastic Solow ~odel. Journal of Applied Econometrics, 12, 357-392.

Lee, Kevin; Pesaran, M. Hashem, and Smith, Ron (1997). Growth and convergence in a multi-country empirical stochastic Solow model. Journal of Applied Econometrics, 12(4), July-August, 357-392.

Lee, Kevin; Pesaran, M. Hashem, and Smith, Ron (1998) . Growth empirics: a panel data approach - a comment. Quarterly Journal of Economics, 113(1 ), February, 319-323.

Lee, Michael; Longmire, Ritchard; Matyas, Laszlo, and Harris, Mark (1998). Growth convergence: some panel data evidence. Applied Economics, 30(7), July, 907-912.

*Evans, Paul (1998). Using panel data to evaluate growth theories. International Economic Review, 39(2), May, 295-306.

*Binder, M. and M.H. Pesaran (1999), Stochastic growth models and their econometric implications, Journal of Economic Growth, 4(2), 139-183.

Sf. Trade and Convergence *Sachs, J. D. and Warner, A. (1995). Economic reform and the process of global integration. Brookings Papers on Economic Activity, 1.

Ben-David, Dan (1996). Trade and convergence among countries. Journal of International Economics, 40 (3/4), May, 279-298

Ben-David, D. and Boar, A. K. (1997). Evidence on the contribution of trade reform towards international income equalization. Review of International Economics, 5(2), May, 246-255.

*Slaughter, M. J. (1997). Per capita income convergence and the role of international trade. American Economic Review, 87(2), 194-204.

*Ben-David, Dan and Louie, Michael (1998). Free trade, growth and convergence. Journal of Economic Growth, 3, 143-170.

Sg. Regional Convergence Barro, R.J. and X. Sala-i-Martin (1992) , Regional Growth and Migration: A Japan-United States Comparison, Journal of the Japanese and International Economies, 6, December. 312-346.

*Barro, R.J. and X. Sala-i-Martin (1995), Economic Growth, McGraw-Hill, Chapters 10, 11.

Cashin, P. (1995), Economic Growth and Convergence Across the Seven Colonies of Australasia: 1861-1991, The Economic Record, 71 (213), June. 132-144.

Evans, Paul and Karras, Georgios ( 1996). Do economies converge? Evidence from a panel of US states. Review of Economics and Statistics, 78(3), August, 384-388.

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Oxley, L. and Greasley (1999), A Nordic convergence club? Applied Economics Letters, 6, 157-160.

6. Technology and Technology Transfer

Gomulka, Stanislaw ( 1971 ). Inventive activity, diffusion, and the stages of economic growth. Institute of Economics, Aarhus.

Singer, Hans W. and Reynolds, Lyn (1975). Technological backwardness and productivity growth. Economic Journal, 85, December, 873-876.

Lau, M.L. and Wan, H. (1991), "The Theory of Growth and Technology Transfer: Experience from East Asian Countries," The Seoul Journal of Economics, 4, 109-122.0n the Mechanism of Catching Up," European Economic Review, 38, 1993, 952-963.

*Bernard, Andrew B. and Jones , Charles I. (1996). Technology and convergence. Economic Journal, 106, July, 1037-1044.

Goodfriend, Marvin and McDermott, John (1998). Industrial development and the convergence question. American Economic Review, 88(5), 1277-1289.

*Chuang, Yih-chyi (1998). Learning by doing, the technology gap, and growth. International Economic Review, 39(3), August, 697-721.

7. Population and Growth

*Becker, G. S., Murphy, K. M. and Tamura, R. (1990). Human capital, fertility, and economic growth. Journal of Political Economy, October, 98(5), S 12-37.

Becker, G. S., Murphy, K. M. and Tamura, R. (1990). Human capital, fertility, and economic growth. Journal of Political Economy, October, 98(5), S 12-37.

*Kremer, M. (1993). Population growth and technological change: one million B.C. to 1990. Quarterly Journal of Economics, August, 108(3), 681-716.

Galor, 0 . and Zang, H. (1997). Fertility, income distribution, and economic growth: theory and cross-country evidence. Japan and the World Economy, 9(2), 197-229.

*Jones , C. (1998) , Population and ideas: A Theory of endogenous growth, 42 pp. Downloadable from the author's home page.

8. Trade, Openness, and Growth

Leamer, E. E. (1988) . Measures of openness. In R. Baldwin (ed.) Trade policy issues and empirical analysis. University of Chicago Press, Chicago.

Dollar, D. (1991). Outward oriented developing economies really do grow more rapidly: evidence from 95 LDCs, 1976-85. Economic development and cultural change, 40(3), 523-544.

*Fagerberg, Jan (1994 ). Technology and international differences in growth rates. Journal of Economic

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Literature, 32, September, 1147-1175.

*Sinha, Tapen and Sinha, Dipendra (1996). An empirical investigation into the relationship between openness and economic growth: evidence from Asia. International Review of Economics and Business, April, 359-370

Harrison, A. (1996). Openness and growth: a time series, cross-country analysis for developing countries. Journal of Development Economics, 48, 419-447.

*Grossman, G.M. and E. Helpman (1997), Innovation and Growth in the Global Economy, The MIT Press. Chapters 1, 9, 10.

Gundlach, Erich (1997). Openness and economic growth in developing countries. Weltwirtschaftliches Archiv, 133, 479-496.

*Edwards, S. (1998). Openness, productivity and growth: what do we really know? Economic Journal, 108, March, 383-398.

*Frankel, J.A. andD. Romer (1999), Does trade cause growth? American Economic Review, 89(3), 379-399.

9. Democracy and Growth

*Przeworski, Adam, and Fernando Limongi (1993), Political Regimes and Economic Growth, Journal of Economic Perspectives, 7, 51-69.

Perotti, R. ( 1996). Democracy, income distribution and growth: What the data say, Journal of Economic Growth, I, June, 149-187.

Brunetti, Aymo (1997), Politics and Economic Growth, A Cross-Country Data Perspective, Development Center Studies, Development Center of the OECD. Paris.

Siermann, Clemens L.J. (1998), Politics, Institutions, and the Economic Performance of Nations, Edward Elger, MA: Northampton.

*Durham, J.B. (1999), Economic growth and political regimes, Journal of Economic Growth, March, 81-111.

Hsiao, F.S.T. and M. W. Hsiao (1999), Economic Liberalizaion and Development--The Case of Post-Martial Law Era in Taiwan, mimeographed paper.

*Hsiao, F.S.T. and M. W. Hsiao (1999), Civil liberties, economic freedom, and economic growth, mimeographed paper.

10. Inequality and Growth

*Alesina A. and D. Rodrik (1994). Distributive politics and economic growth, Quarterly Journal of Economics, 465-490.

Benabou, R. (1996). Inequality and growth. NBER macroeconomics annual, 11-76.

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*Persson T. and G. Tabellini (1994). Is inequality harmful for growth? American Economic Review, 84, 600-621. ·

Perotti , R. (1996). Democracy, income distribution and growth: What the data say, Journal of Economic Growth, 1, June, 149-187.

Benabou, R. (1996). Inequality and growth. NBER macroeconomics annual, 11-76.

*Partridge, Mark D. (1997). Is inequality harmful for growth? Comment. American Economic Review, 87(5), December, 1019-1032.

*Chiu, W. (1998). Income inequality, human capital accumulation and economic performance. Economic Journal, 1,08, 44-59.

Chang, Roberto (1998). Political party negotiations, income distribution, and endogenous growth. Journal of Monetary Economics, 41(2), April, 227-255.

Aghion, Philippe, Caroli, Eve and Garcia-Penalosa, Cecilia (1999). Inequality and economic growth: the perspective of the new growth theories, Journal of Economic Literature.

11. The East Asian Miracle

*Lucas, R. E. (1993), "Making a Miracle," Econometrica, 61(2), March, 251-272.

*Lau, M.L. and Wan, H. (1993), "On the Mechanism of Catching Up," European Economic Review, 38, 1993, 952-963.

Sinha, Tapen and Sinha, Dipendra ( 1996). An empirical investigation into the relationship between openness and economic growth: evidence from Asia. International Review of Economics and Business, April, 359-370

*Hsiao, F.S.T. and M. W. Hsiao (1999) , Falling behind but catching up in the long run--on capitalistic development of Taiwan and Korea, mimeographed paper.

12. Energy, Environment, and Growth

a. Energy and Resources Jorgenson, Dale W. (1981) The Role of Energy in Productivity Growth. in J.W. Kendrick (ed.) International Comparisons of Productivity and the Causes of the Slowdown, Cambridge, MA: MIT Press.

David, Paul A. (1990) The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox. American Economic Review, May, 255-361.

*Bresnahan, Timothy and Trajtenberg, M. (1995) General Purpose Technologies: Engines of Growth? Journal of Econometrics, January, 65(1), 83-108.

*Helpman, E: ( ed) ( 1998), General Purpose Technologies and Economic Growth , Cambridge: MIT Press, 1998, Introduction, 1-13.

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*Sachs, J. and A.M. Warner (1995), Natural resource abundance and economic growth,

NEER working paper no. 5398.

b. Environment Gradus, R. & Sjak Smulders (1993). The Trade-off Between Environmental Care and Long-term Growth -Pollution in Three Prototype Growth Models. Journal of Economics, 58( 1 ), 25-51.

John, A. and Pecchenino, R. ( 1994). An Overlapping Generations Model of Growth and the Environment. Economic Journal, 104, 1393-1410.

Bovenberg, A.L. and Smulders, Sjak (1995). Environmental Quality and Pollution-augmenting Technological Change in a Two-Sector Endogenous Growth Model. Journal of Public Economics, 57, 369-391.

Elbasha, Elamin H. and Roe, Terry L. ( 1996). On Endogenous Growth: The Implications of Environmental Externalities. Journal of Environmental Economics and Management, 31, 240-268.

*Hofkes, Marian W. (1996). Modelling Sustainable Development: An Economy-Ecology Integrated Model. Economic Modelling, I 3, 333-353.

Aghion, Philippe and Howitt, Peter (1998). Endogenous Growth Theory, chapter 5. MIT Press, Cambridge, Mass.

*Stokey, Nancy L. (1998). Are There Limits to Growth? International Economic Review, 39, pp. 1-31.

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