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   Course Title    Theory and Empirics of Economic Growth
Lecturer    Alvar Kangur
Institution    Tallin Technical University
Country    Estonia


I Introduction

Living in the period of massive transitions and in economical sense "fascinating" events it may be hard to stop for a moment and take a broader look at the development of economies in long term. Indeed, the short-run fluctuations we observe practically every day have a relatively minor effect on nation’s living standards. Today, with significant advances in growth theory and availability of large databases, economists have realized that long-term fluctuations are at least as important as short-term changes.

The intention of this course is to concentrate on the specific field of macroeconomics – economic growth. It reviews the evolution of theory of economic growth, starting from orthodox neoclassical models, advancing gradually towards "new growth theory" of technological change also allowing for other endogenous assumptions. In addition to theory key empirical regularities and findings are discussed and students are encouraged to use their obtained knowledge in computer-lab sessions.

"Theory and Empirics of Economic Growth" is an optional course in MA curriculum, lasting for 8 weeks and 32 academic hours: 8 lectures (16 academic hours) and 8 seminars/computer labs (16 academic hours). In addition students are left with "independent work" and with intention to cover some essential literature. Students attending this course are expected to have pervaded mandatory intermediate macroeconomics and must have some basic knowledge in econometrics and mathematical methods.

 

II Objectives of the course

a, Academic Aims

General aims of the course are to provide the students with background of sources and theory of growth (exogenous as well as endogenous), and in this framework to discuss related real-world issues and apply theory to real data and processes observed in the world. Thus, in addition to the theoretical knowledge, students should be able to develop their practical skills and make use of mathematical methods learned in previous courses.

b, Learning Outcomes

After completing this course students should be able to:

  • Orient among various growth models and concepts related to growth theory.

  • Discuss the differences in growth models (exogenous versus endogenous) and their policy implications.

  • Understand the mechanism of neoclassical growth theory and possibilities of augmenting.

  • Explain possible concepts and ideas underlying "new growth theory".

  • Distinguish between different approaches to convergence.

  • Discuss observed growth and convergence patterns observed in real world in the framework of orthodox as well as new growth theory.

  • Explain different empirical approaches in research papers on growth and convergence.

  • Apply those approaches on real data.

 

III Course Detail

a., Lecture Synopsis

Lecture I. Introduction to economic growth.

  • Short overview of history of growth theory.

  • The "stylized facts" of economic growth; empirical findings.

Lecture II. Growth accounting. Neoclassical model of economic growth.

  • Solow residual.

  • Solow-Swan model: the basic structure.

  • Neoclassical production function (Inada conditions).

  • The steady state.

  • The Golden rule of capital accumulation.

  • Technological progress (labor-augmenting).

Lecture III. Hypotheses of convergence. Applications of neoclassical growth model.

  • Absolute and conditional convergence.

  • Convergence versus dispersion.

  • Problems for neoclassical growth theory (the magnitude of international differences, rate of convergence, rates of return).

  • Introducing human capital.

Lecture IV. Ramsey model. Assumption of the open economy.

  • Consumer optimization.

  • Applications on saving rate and convergence.

  • Modified Ramsey model for open economy.

Lecture V. Theory of endogenous growth.

  • Constant returns to capital (the AK model).

  • Knowledge spillovers, learning by doing, research and development, public infrastructure.

  • Policy implications.

Lecture VI. Two-sector models of endogenous growth with broad measure of capital.

  • Physical and human capital produced with identical production functions (one sector model).

  • Physical and human capital produced by different technologies.

Lecture VII. Technological change.

  • Diminishing returns versus technological progress.

  • Technological progress as an expansion of the number of varieties of products.

  • Technological progress as quality improvements of products.

Lecture VIII. Modifications of exogenous population and labor force. Conclusion.

  • Migration, fertility and leisure choices in models of economic growth.

  • Concluding remarks.

b, Seminar Synopsis.

Seminar I. Introductory seminar. In this seminar course syllabus will be explained and some required material distributed. Also the content of the first lecture will be discussed.

Seminar II. Computer lab session. Students will be familiarized with available (econometric) software needed for further computer sessions. Some issues concerning orthodox growth theory are discussed and computation exercises on computers solved.

Problems for discussion.

  • Explain the predictions of Solow-Swan neoclassical growth model and their consistence with experience.

  • Explain the role of Solow-Swan model in explaining real world phenomenon.

  • Should different countries use different production functions?

  • Discuss the effects of higher saving rate in short as well as long run.

Seminar III.

Convergence. Neoclassical growth theory and concepts of convergence are discussed in detail. Several basic working papers are covered.

Problems for discussion.

  • Explain the differences between absolute convergence, conditional convergence and a reduction in the dispersion of real per capita income.

  • Explain the nature of the problems for Solow-Swan growth model.

  • What are the implications of including human capital into Solow-Swan growth model?

  • Derive a log-linear regression equation for output per worker for this augmented Solow-Swan model.

Seminar IV. Computer lab session. Data on economic growth and regional data sets. Basic data used in growth modeling and some empirical results are described, also their consistence with theory discussed. Students test convergence predictions on the computers. Some aspects of Ramsey model are covered.

Problems for discussion.

  • How is the Solow-Swan model modified in Ramsey model with consumer optimization?

  • Discuss the conclusions of modified Ramsey model.

Seminar V. Endogenous growth theory. The basic principles of endogenous growth theory are discussed. Several topics for practical assignment will be proposed.

Problems for discussion.

  • What are the options to endogenize the growth process?

  • How the endogenous growth models solve the problem of convergence?

 

Seminar VI. Computer lab session. Students are expected to chose practical assignment what they will carry out through VI – VIII seminars. This can be done in small working groups.

Problems for discussion.

  • Explain the implications of two-sector models of endogenous growth?

Seminar VII. Computer lab session. Students continue work on practical assignments.

Problems for discussion.

  • Explain how the technological progress can be endogenized.

Seminar VIII. Computer lab session. Students compleate work on practical assignment and are expected to give short presentations on their work.

 

IV Assessment

The course will end with a written examination, which comprises of two parts. The first part examines student’s knowledge of specific concepts and processes and consists of questions requiring short answers. Questions in the second part require longer explanations and may include graphical presentations. Student (group of students) will qualify for final examination after presenting and documenting their work on practical assignment.

 

V Reading list

    Required Readings

  1. Barro, R.J. and X. Sala-I-Martin (1995). Econommic Growth. New-York: McGraw-Hill.

  2. Valders, B. (2000). Economic Growth Theory, Empirics and Policy.

    Complementary Readings

  3. Aghion, P. and P. Howitt (1998). Endogenous Growth Theory. MIT Press.

  4. Barro, R.J. (1999). Determinants of Economic Growth.

  5. Barro, R.J. (1991). Economic Growth in a Cross-section of Countries. Quarterly Journal of Economics, 106(2), pp. 407-444.

  6. Barro, R.J. and X. Sala-I-Martin (1992). Convergence. Journal of Political Economy, 100(2), pp. 223-251.

  7. de la Fuente, A. (2000). Convergence Across Countries and Regions: Theory and Empirics. CEPR discussion paper no. 2465.

  8. Jones, C.I. (1997). Convergence revisited. Journal of Economic Growth, July, 2(2), pp. 135-153.

  9. Mankiw N.G. (1995). The Growth of Nations. Brookings Papers of Economic Activity, 1, pp. 275-326.

  10. Mankiw N.G., Romer D. and D.N. Weil (1992). A contribution to the Empirics of Economic Growth. Quarterly Journal of Economics, 107, pp. 408-437.

  11. Romer, D. (1996). Advanced Macroeconomics.

  12. Sala-I-Martin, X. (1995). The Classical Approach to Convergence Analysis. Economic Journal, 106, pp. 1019-1036.

 

VI Teaching Methodology

The course consists of 8 lectures, each followed by seminar/computer labs. In lectures several topics are covered of which key points are discussed in seminars. Most seminars are conducted in computer lab form, where students can make use of econometrical software and work on practical assignments.



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