FIRST GENERATION

ENDOGENOUS GROWTH

SURABAYA, 20 SEPTEMBER 2019

 As Critical of
Solow Model
What will we learn in
this chapter?

1. Definition, Characteristic and Model

of Endogenous Growth Theory
2. Endogenous Growth Technique
3. Implementation
 Endogenous Growth : Background & Definition

 Teori Pertumbuhan Endogen (Endogenous growth theory)

adalah Teori Pertumbuhan yang menekankan bahwa Old Growth Theories : Solow dkk
pertumbuhan ekonomi merupakan hasil dari dalam suatu Labor Capital
sistem ekonomi itu sendiri, bukan dari luar sistem. Teori ini
pertama kali dimunculkan oleh Paul Romer (1994) yang
dilatar belakangi oleh ketidakpuasan terhadap model
New Growth Theories : Romer
sebelumnya dalam menjelaskan pertumbuhan jangka
panjang (Harrod Domar, Neoklasik Solow, dsb). Labor Capital Technology

 Romer membentuk suatu model Pertumbuhan Jangka

Panjang dimana faktor kuncinya adalah variable
perkembangan teknologi, serta variabel perkembangan
teknologi ini digolongkan sebagai variable endogen, bukan
eksogen seperti yang ada dalam model Neoklasik Solow.
Endogenous Growth : Characteristics

Terdiri dari 3 sumber

pertumbuhan : Labor ,
Capital , Technology

Teori
Bukan teori baru, tetapi
bersifat Pertumbuhan Increasing
memperbaharui yang Return to Scale
telah ada Endogen :
Romer

Non-Diminishing
Return
 Endogenous Growth :
Solow Vs Romer (Technique Comparison)

Solow Y= H𝐿α 𝑥 𝐾 1−α ; (0 < α < 1)

• K adalah Modal / Capital ; L adalah Labor / Tenaga Kerja
• Teknologi diasumsikan eksogen, tidak ada didalam model.
• Asumsi Diminishing return & Constant Return to Scale
• α adalah intensitas/proporsi Labor dalam menghasilkan 1 output
• 1 − α adalah intensitas/proporsi capital dalam menghasilkan 1 output

Romer α 1−α
Y = A 𝑥 𝐻𝐿 𝑥 𝐾 ; (0 < α < 1)
• A adalah Teknologi / Inovasi / Ide / R&D
• H adalah Human Capital sebagai multiplier dari Labor
• Asumsi Non Diminishing Return & Increasing Return to Scale
 Endogenous Growth : Assumptions
 Dalam Endogenous growth theory Romer,
pentingnya peran teknologi dalam
mempengaruhi pertumbuhan output
membuat variabel teknologi ikut
dimasukkan kedalam model dan berusaha
dikuantifikasikan agar growth rate dapat
terukur.
 Teknologi disini bisa meliputi Ide, Inovasi,
atau segala bentuk perkembangan zaman
yang mendukung percepatan pertumbuhan
output produksi suatu negara/perusahaan.
 Keberadaan Teknologi ini membuat asumsi
dalam teori pertumbuhan endogen versi Paul
Romer menjadi non-diminishing return
dimana ketika input terus ditambah melebihi
kapasitas produksi dari input, maka
output/return/pendapatan bisa terus
meningkat (bukan menurun).
 Selain itu, keberadaan Teknologi juga
memunculkan asumsi increasing return to
scale dimana besarnya peningkatan output
yang dihasilkan akan lebih besar secara
proporsional dibandingkan peningkatan
peningkatan faktor produksi/input produksi..
PERBANDINGAN MODEL PERTUMBUHAN NEOKLASIK (SOLOW)
DENGAN TEORI PERTUMBUHAN ENDOGEN
LITERATURE REVIEW
LITERATURE REVIEW 1 (SCIENCEDIRECT)
Endogenous Growth Theory And Regional Performance:
The moderating effects of special economic zones (2016)
Wei-Hwa Pan , Xuan-Thang Ngo (2016)
*

This Research explored regional performance from the perspective of endogenous growth
theory.
This Research empirical investigation is conducted on a panel dataset of 64 Vietnamese
provinces over the period 2001-2006 and integrates moderated regression analysis.
 FINDINGS

 In model 2, FDI has been proven to be insignificantly related to economic development, may be because of its potential
collinearity with K and SEZ, which capture the growth effects in model 2. But in model 3, FDI has been proven significant.
As a factor related to openness and external linkage, FDI in the establishment of SEZs provides not only access to scarce
resources but also a better institutional environment. The influx of FDI in SEZs can positively affect economic growth,
while FDI in other provinces without SEZ establishment seems to contribute less to economic growth.
CONCLUSIONS
CLICK TO EDIT MASTER TITLE STYLE

 In Figure 2, we may conclude that SEZ (industrial zone) has significant and positive impact to GDP. Those
after SEZ has interaction with (a) Degree of openness ; (b) FDI ; (c) Capital Investment.

 Currently, more than two thirds of the provinces (43/64 provinces) have at least one SEZ (or industrial zone)
in Vietnam. Those provinces are generally more developed in terms of the economic and institutional
conditions that are appealing to FDIs.
LITERATURE REVIEW 2 (SCIENCEDIRECT)
The Romer Model with Monopolistic Competition and General Technologies (2019)
Using Mathematical Method
Federico Etro (2019)
• The Writer augments the Romer Model of endogenous technological progress with a general CRS
Production function in labor & intermediate inputs. This determines markups & profits of the
innovators in function of the number of inputs. Under imperfect substitutability the economy can
converge to a steady state (as under a nested CES technology), replicating the properties of
neoclassical growth due to a decreasing marginal profitability of innovation.

• In this paper, the marginal, profitability of innovation (the additional profit from introducing new
varieties) tends to decrease along the growth process, replicating the same phenomena of the
neoclassical model. Output growth can decline over time delivering convergence toward a steady
state in which R&D investment replaces obsolete technologies. The Writer shows the emergence
of this pattern in an example based on a nested CES technology which preserves constant
markups but delivers decreasing marginal profitability of innovation.
 The Romer Model with Monopolistic Competition and General
Technologies

• The Paper is organized as follows :

(1) The Romer (1990) model of endogenous growth and most of its extension are based
on the following CRS production function for a perfectly competitive sector
producing final goods :

Where :
Xj = intermediate goods produced in a given moment
α = between 0 to 1, representing the factor share of income from intermediate
goods
L = Constant labor input
A = Labor productivity
 The Romer Model with Monopolistic Competition and General
Technologies

• The Paper is organized as follows :

(2) Romer Model using technology emerges under a production function that is directly
additive in the intermediate inputs, as in

Where :
G = CRS in labor intermediate goods produced in a given moment
Xj = Amount intermediate goods produced
L = Constant labor input
A = Labor productivity
 The Romer Model with Monopolistic Competition and General
Technologies

• CONCLUSION
(3) Conclusion : the possibility of long run growth depends on the shape of the function
h(n)/n which represents output per effective worker and per intermediate good. The
growth in the long run can be positive and sustainable only if the g(n) remains
positive

Where :
g(n) = Growth in certain n goods
sλh(n)/n = Steady state of elasticity of the equilibrium production with respect to
the number of inputs
LITERATURE REVIEW 3 (SCIENCEDIRECT)
Liquidity, Innovation, and endogenous growth (2019)
Semyon Malamud, Francesca Zucchi (2019)
• The Writers build a model of innovaton-driven endogenous growth in which innovative firms have
costly access to outside financing and hoard cash reserve to maintain financial flexibility. We show
that financing frictions slow down Schumpeterian creative destruction by discouraging entry. As a
result, financing frictions importantly affect the composition of growth, by reducing the
contribution of entrants but spurring the contribution of incumbents. We investigate the net
impact of these countervailing effects on the equilibrium growth rate and welfare.
• Endogenous models assume that innovation is the engine of growth. Existing models implicitly
assume that firms can raise funds to finance innovation (or R&D) at no cost. In Practice,
innovative firms face financing frictions. studies illustrate that R&D is hard to finance with external
funds because it is not pledgeable, has an uncertain outcome, and involves trials and errors.
• To avoid financial frictions, the writers combine two theoretical fameworks. First, building a
dynamic corporate finance model with financing frictions to understand how firms manage their
investment in innovation in the presence of financing frictions. Second, using a model of
endogenous growth to aggregate firm-level decisions into general equilibrium.
 Baseline Parameterization

• Table 1 reports the baseline parameterization, following Akcigit and Kerr

(2018), Acemoglu et al. (2018) to determine innovation rates of incumbents
and entrants
 FINDINGS

• The Writers focused on three environments in the magnitude of financing costs :

• 1. CE1 in which entrants face larger financing costs than incumbents
• 2. CE0 in which entrants and incumbents face identical financing costs
• 3. UE (Unconstrained Economy) in which there are no financing costs
• The main result is, (1) Incumbents gain a stable innovation rate when the cash reserves increase,
both in CE1 (larger financial frictions) and CE0 (Identical) ; (2) Entrants face an increasing trend of
innovation rate when the cash reserves increases, both in CE1 (larger) and CE0 (identical)
 Concluding Remarks

• The Writer’s key prediction is that financing frictions importantly change the
composition of growth, deterring the contribution of entrants and stimulating
the contribution of incumbents.

• Incumbents are more valuable and set higher innovation rates in the CE than
in the UE. We investigate the net effect of these offsetting strengths on the
equilibrium growth rate and on welfare. Our model illustrates that more
severe financing frictions can locally stimulate growth and welfare in
economies in which entry requires large setup costs.
LITERATURE REVIEW 4

Population, Pensions, and Endogenous Economic Growth

Burkhard Heer and Andreas Irmen (2014)
This paper studies the effect of a declining labor force on the incentives to engage in labor-
saving technical change and ask how this effect is influenced by institutional characteristics
of the pension scheme. When labor is scarcer it becomes more expensive and innovation
investments that increase labor productivity are more profitable.
DATA AND MODEL ANALYSIS
This research incorporate this channel in a new dynamic generale quilibrium model with
endogenous economic growth and heterogeneous overlapping generations (large-scale
OLG model).
This paper studies the economic consequences of the link between demographic changes,
pensions, and the incentives of firms to engage in innovation investments that affect total
factor productivity (TFP). With a focus on the US economy and the time span between
1950 and 2200.
FINDINGS (1)

The effect of a decline in population

growth on labor productivity growth
is positive and quantitatively
significant. In this paper benchmark,
it is predicted to increase from an
average annual growth rate of
1.74% over 1990–2000 to 2.41% in
2100. As we approach the steady
state after 2200, qt rises even
further. In the steady state
q*=2.52% is constant and coincides
with the growth rate of labor
productivity, TFP, and all per-capita
variables.
 FINDINGS (2)

Institutional Characteristics of The Pension System Matter Both for The

Growth Performance and For Individual Welfare.
1. Under a constant social security contribution rate from 2011 onwards, all agents born
after 1986 benefit. The welfare effects are quantitatively substantial. While the losses
for the generations born between 1960 and 1986 are also significant, they do not
exceed 1.7% of total consumption; the gains accruing to the generations born after
1986 are large and increase over time.
2. If the retirement age increases from 65 to 70, the welfare of all workers affected by
this change in legislation declines by approximately 2.4% of total consumption. This
finding suggest that an increase in the age of retirement is not a worthwhile policy.

Institutional characteristics of the pension scheme three different policy scenarios that will become effective in period t0 : (1)Constant
replacement rate: ζt = bt /(1-τw-τb) wt lt = ζ, (2) Constant contribution rate starting in period t0: τb,t = τb,to for t=t0, (3) Constant
replacement rate and later retirement at age 70,i.e., R=51.
LITERATURE REVIEW 5

Endogenous Labor Share Cycles: Theory And Evidence

This research identify its substantial medium-to-long run, pro-cylical swings and show that most of its
variance lies beyond business-cycle frequencies. This research explores the extent to which these
empirical regularities can be explained by a calibrated micro-founded, nonlinear growth model with
normalized CES technology and endogenous labor- and capital augmenting technical change driven by
purposeful directed R&D investments.
DATA AND MODEL ANALYSIS
This is an endogenous growth model with two R&D sectors giving rise to capital as well as labor augmenting
innovations augmenting the “technology menu” .
(i) model is non-scale: both R&D functions are specified in terms of percentages of population employed in
either R&D sector
(ii) assume R&D workers are drawn from the same pool as production workers ;
(iii) assume more general R&D technologies which allow for mutual spillovers between both R&D sectors and
for concavity in capital-augmenting technical change;
(iv) the BGP (balance growth path) growth rate g depends on preferences via lY (labor in aggregate
production). The tradeoff is due to drawing researchers from the same employment pool as production
workers and;
(v) use normalized constant elasticity of substitution (CES) production functions.
 FINDINGS

Dynamic macroeconomic trade-offs created by arrivals of both types of new technologies

can lead to prolonged swings in the labor share (and other model variables) due to
oscillatory convergence to the balanced growth path as well as emergence of limit cycles via
Hopf bifurcations. Both predictions are consistent with the empirical evidence.

Given baseline calibration, the decentralized allocation of the model exhibits endogenous, dampened oscillations of the
labor share and other de-trended model variables (Table 5). These are long swings, similar to the one observed
throughout the 20th century in the US and elsewhere rather than business-cycle fluctuations
LITERATURE REVIEW 6
Abatement R&D, Market Imperfections, And
Environmental Policy In An Endogenous Growth Model

This paper develops an endogenous growth model featuring environmental externalities,

abatement R&D, and market imperfections. This research compares the economic
performances under three distinct regimes that encompass public abatement, private
abatement without tax recycling, and private abatement with tax recycling.

DATA AND MODEL ANALYSIS

This paper develops an endogenous growth model featuring an environmental externality,
abatement R&D, and market imperfections. More specifically, the market structure is
considered characterized by three vertically integrated sectors (the households, the
production sectors, and the government) in US
Where environmental quality and pollution are limited in
a physical sense, and allot her economic variables grow at
a common constant endogenous growth rate “g”
 FINDINGS (1)

The numerical values of social welfare under the three regimes are reported in the last column of Table2. In the GA
regime, the steady state growth rate is about 3.12%. In the PA regime, the government switches the abatement spending
to a lump-sum transfer, and the intermediate firms are forced to purchase the license fee for abatement knowledge from
the R&D firms. Under such an arrangement, the growth rate declines to 1.43% in response. However, if the tax revenue
sarere cycled to subsidize theR&D sector,the growth rate of 3.55% is ranked the highest among the three regimes.

Noted :
Regimes :public abatement (GA), private abatement without tax recycling (PA), and private abatement with tax recycling (PAR)
N* = environmental quality under the three regimes P* = total pollution under the three regimes
h* = investment to capital ratio under the three regimes g* = endogenous growth rate under the three regimes
W* = welfare under the three regimes
 FINDINS

1. There exists at trade-off between economic growth and

environmental quality in a “regime selection” sense.
2. The benefit a rising from the private conduct of abatement
becomes larger the greater the degree of the firms’ monopoly
power. This potentially implies that antitrust policies might in some
way reduce growth and welfare in a private abatement R&D model.
3. If the government recycles the environmental tax revenues to
subsidize private abatement R&D, the growth rate and welfare will
be higher than in almost all other regimes.
4. The beneficial effects of public abatement policies will be eroded
when government spending on transfer payments increases.
LITERATURE REVIEW 7
Endogenous Growth And Global Divergence In A Multi-Country Agent-Based Model
Giovanni Dosi, Andrea Roventini, Emanuele Russo (2019)

This paper developed an agent-based multi-country model in order to investigate

endogenous growth patterns of divergence/convergence among different economies. The
model bridges theoretical insights from evolutionary theory with applied research in the
technology-gap tradition and indeed with plenty of historical evidence.
DATA AND MODEL ANALYSIS
This paper used agent-based model (ABM) which consider the economy as a complex
evolving system.
The variables considered are: the average coefficient of variation for GDP per worker during
the last 50 periods of the simulation; the p-value of the Silverman test for the null of
unimodality at t = 500; the average growth rate of world GDP
 Number of countries : 60
 Number of industries : 30
 Number of firms (each industry) : 20
FINDINGS

This paper shows indeed the generic

emergence of divergent and complex growth
dynamics exhibiting a strong tendency towards
polarization and clubs formation.
Moreover, each country experiences a
structural transformation of its productive
structure during the development process. Such
dynamics results from firm-level virtuous
(or vicious) cycles between knowledge
accumulation, trade performances, and growth
dynamics.
 Fig. 5 show the evolution of the whole empirical
density of international incomes, which clearly
moves from an unimodal shape towards a bimodal
one at the end of the simulation. In turn, the model
endogenously generates two convergence clubs for
poor and advanced countries, with the latter being
relatively smaller than the former
LITERATURE REVIEW 8
Long-run growth and welfare in a two sector endogenous growth model with productive and non-
productive government expenditure
Rolando A. Escobar-Posadaa, Goncalo Monteirob, 2016
• This paper develop a two-sector model of physical and human capital accumulation, where public
goods provide both productive capital (i.e. infrastructures) and utility enhancing services.
DATA AND MODEL ANALYSIS
Finding
• The steady state equilibrium for the stock case while exploring the
importance of the elasticity of substitution on key variables of our
model. When η = 0, the equilibrium corresponds to the case where
the public good provides no utility and is only relevant as a productive
input. From the table we see that the benchmark equilibrium (in
bold) implies a steady state physical-to-human capital ratio ( ˜ k ) of
0.424, a consumption-to-human capital ratio ( ˜ c ) of 0.192, and a
public-to-human capital ratio ( ˜ k p ) of 0.719. In addition, the
physical-to-human capital ratio in the output sector ( ˜ ω) and the
consumption–output ratio are 0.498 and 0.682, respectively, while
the steady state is characterized by a balanced growth rate of 7.85%
and a welfare level of −50.08.
(1) Increasing the relative importance of the public good in utility leaves the
private to human capital ratio (k) basically unchanged.
(2) Increasing the relative importance of the public good in utility raises the
steady state value of welfare, ˜ c, ˜ k p , and the consumption–output
ratio.
(3) The growth rate and the physical to human capital ratio in the final
output sector ( ˜ ω) are decreasing in the weight of public good.
(4) Increasing the elasticity of substitution between inputs, raises the
balanced growth rate and the consumption–output ratio while reducing
the steady state of all other variables, k, c, k p , ω , and welfare.
(5)Contrarytowhathappensinthepresenceoflowsubstitutabilityofinputs,highe
rvaluesof η reduces welfare and increases the growth rate whens X → ∞;
s Y → ∞.
LITERATURE REVIEW 9
From Solow To Romer: Teaching Endogenous Technological Change In
Undergraduate Economics

• Angus C. Chu 2018

This paper learn economic growth theory through the seminal Solow
model, which takes the growth rate of technology as given. To
understand the origin of technological progress, and need a model of
endogenous technological change. The Romer model fills this
important gap in the literature.
 Data and Model analyzing

The Solow model with exogenous technological progress. Output Y is produced by an aggregate
production function Y=Kα(AL)1−α, where A is the level of technology that grows at an exogenous
rate g > 0,K is the stock of capital, and L is the size of a constant labor force. The parameter α∈(0, 1)
determines capital intensity α and labor intensity 1−α in the production process. The key equation
in the Solow model is the capital-accumulation equation given by ΔK=I−δK, where the parameterδ >
0 is the depreciation rate of capital. Investment I is assumed to be a constant share s∈(0, 1) of
output Y. Substituting the investment function I=sY and the production function Y=Kα(AL)1−α into
the capital-accumulation equation yields
Then be used to explore the transition dynamics of an economy from an
initial state to the steady state, which is a common analysis in
macroeconomic textbooks at the intermediate level. In the long run, the
economy is on a balanced growth path, along which capital K grows at a
constant rate implying that Y/K and A/K are constant in the long run. This in
turn implies that in the long run, output Y and capital K grow at the same
rate as technology A; i.e.,
 Finding

Using comparative statics to explore the determinants of economic growth in the Romer model. Eq.
(14) shows that the equilibrium growth rate g* is increasing in {θ, μ, α, L} and decreasing in r.
• Experiment 1: changing R&D productivity
• Experiment 2: changing the monopolistic price
• Experiment 3: changing the interest rate
• Experiment 4: changing capital and labor intensity in production
• Experiment 5: changing the size of the labor force
LITERATURE REVIEW 9
Endogenous fluctuations in an endogenous growth model: An analysis of
inflation targeting as a policy

Rangan Gupta , Lardo Stander 2018

This paper is implementing two different monetary policies – an inflation
targeting policy as well as a cash reserve requirement – in a monetary
endogenous growth overlapping generations model characterized by pro-
diction lags and analyze the growth dynamics that emerge from this
framework. The growth process is androgenized by allowing productive
government expenditure on infrastructure, complementing the lagged private
capital input. In the presence of these monetary policies, we show that
multiple equilibrium emerge along different growth paths, with the low-growth
(high-growth) equilibrium being unstable (stable) and locally determinate
(locally indeterminate)
 Data and Model Analazing

• All consumers have the same preferences, so there is a representative

agent in each period. When young, consumers in elastically supply
their unit of time endowment, n t to earn a real wage of w t that is
saved as a real bank deposit, d t . The consumer retires when old and
consumes c t+1 from the investment of young-age savings 9 .
Formally, the young-age consumer wants to maximize
There exist a finite number of banks in this economy, which are assume
to behave competitively and who are all subject to an obligatory cash
reserve requirement Y t , set by the government. Two simplifying
assumptions – that no resources are used to operate the banking
system and bank deposits are essentially one period contracts –
guarantee that all competitive banks levy the same cost on
Finding
 Conculution

The develop a monetary endogenous growth overlapping generations

models with inflation targeting and characterized by lagged capital in the
production structure, and analyze growth dynamics that arise endogenously. The
growth process is endogenized through productive government expenditure that is
necessary for producing the consumption good. Money is introduced into the
model through a banking sector that intermediates between depositors
(consumers) and borrowers (firms) in a competitive environment, but are subjected
to a cash reserve requirement on deposits. This obligation leads to a distortion in
financial intermediation, driving a wedge between the real loan rate and the real
deposit rate in equilibrium. If we introduced a simple money growth rule, with no
lagged inputs there would be no growth dynamics. If we account for lagged inputs,
but do not introduce an IT-regime, we could still admit endogenous fluctuations.
An IT regime with no lagged inputs would produce convergent growth dynamics,
without any oscillations. Growth dynamics are introduced through an inflation
targeting monetary authority regime.