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Journal of Economic Growth

, Volume 4, Issue 2, pp 139–183 | Cite as

Stochastic Growth Models and Their Econometric Implications

  • Michael Binder
  • M. Hashem Pesaran
Article

Abstract

This article considers the consequences of explicitly allowing for stochastic technological progress and stochastic labor input in the discrete-time Solow-Swan and AK growth models. It shows that the capital-output ratio, but not output per capita, is ergodic irrespective of whether there is a unit root in technology, and thus is the more appropriate measure to use in the cross-sectional analysis of the growth process. Furthermore, the article derives the cross-sectional and time-series implications of the stochastic Solow-Swan model and contrasts these to those of its deterministic counterpart. Among these implications are that the mean of the capital-output ratio depends in a precise way not only on the saving rate and the growth rate of labor input, but also on the variance and higher-order cumulants of the capital-output ratio. Using the Summers-Heston data for seventy-two countries from 1960 to 1992, strong support is found for the predictions of the stochastic Solow-Swan model as compared to those of its deterministic counterpart (as well as those of the AK model), including a significant negative cross-sectional relationship between the mean and the variance of the capital-output ratio.

stochastic growth models ergodicity econometric implications cross-country growth regressions 

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Copyright information

© Kluwer Academic Publishers 1999

Authors and Affiliations

  • Michael Binder
    • 1
  • M. Hashem Pesaran
    • 2
  1. 1.Department of EconomicsUniversity of MarylandCollege Park
  2. 2.Faculty of Economics and PoliticsUniversity of CambridgeCambridgeU.K

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