Assessment of growth theories

Long-run economic growth is a highly complicated process that involves the decisions and the complex interaction of a large number of economic agents over a long time horizon. So far, modeling this process has remained incomplete and a major challenge for economists. Therefore, this chapter cannot possibly present the “true” model of growth. Rather, it aims at highlighting the strengths and weaknesses of different models. It also summarizes the important lessons to be learned from each model and the pitfalls to be avoided. The filters used in the chapter are usefulness for forecasting, availability of data to test the theory and, most importantly, real world validity of the theoretical conclusions drawn. At the end, this chapter presents a model that takes most of these lessons on board but is also tractable empirically.

This chapter cannot possibly summarize the vast body of theoretical growth models. Textbooks such as Obstfeld and Rogoff (1996), Aghion and Howitt (1998), Frenkel and Hemmer (1999), Jones (2002a) or Barro and Salai- Martin (2004) provide comprehensive overviews of neoclassical and endogenous models with all the mathematics behind them. This chapter only gives an overview of the di_erent approaches. The detailed treatment of individual drivers of growth is left to the subsequent chapters.