Using an error-correction model to test whether endogenous long-run growth exists

Abstract

A major empirical interest in growth studies is whether permanent changes in economic fundamentals affect the long-run growth rate or not. However, a direct time series analysis of this hypothesis may not always be feasible because the permanence of many such changes is rather questionable. This paper explains why examining the long-run effects of temporary changes in investment share on per capita output provides indirectly the answer regarding the effects of (possibly hypothetical) permanent changes in investment share, when log per capita output and log per capita investment are cointegrated. Applying the proposed method to the post-war data of major industrial countries, it is found that a disturbance to investment share does not produce a positive long-run effect in each of the three countries - France, Japan and the United Kingdom - in which log per capita output and log per capita investment are cointegrated. The evidence is unfavorable to the class of endogenous growth models. © 2007 Elsevier B.V. All rights reserved.