Rich Nations, Poor Nations: How Much Can Multiple Equilibria Explain?
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This paper asks whether the income gap between rich and poor nations can be explained by multiple equilibria. We explore the quantitative implications of a simple two-sector general equilibrium model that gives rise to multiplicity, and calibrate the model for 127 countries. Under the assumptions of the model, around a quarter of the world’s economies are found to be in a low output equilibrium. We also find that, since the output gains associated with an equilibrium switch are sizeable, the model can explain between 15 and 25% of the variation in the logarithm of GDP per worker across countries.
KeywordsPoverty traps Multiple equilibria TFP differences Calibration
JEL ClassificationC00 O14 O41 O47
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