NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Catching Up and Falling Behind

Nancy L. Stokey

NBER Working Paper No. 18654
Issued in December 2012
NBER Program(s):   EFG

This paper studies the interaction between technology, a publicly available input that flows in from abroad, and human capital, a private input that is accumulated domestically, as the twin engines of growth in a developing economy. The model displays two types of long run behavior, depending on policies and initial conditions. One is sustained growth, where the economy keeps pace with the technology frontier. The other is stagnation, where the economy converges to a minimal technology level that is independent of the world frontier.

In a calibrated version of the model, transition paths after a policy change can display rapid growth, as in modern growth 'miracles.' In these economies policies that promote technology inflows are much more effective than subsidies to human capital accumulation in accelerating growth. A policy reversal produces a 'lost decade,' a period of slow growth that permanently reduces the level of income and consumption.

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