NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Structural Change with Long-run Income and Price Effects

Diego A. Comin, Danial Lashkari, Martí Mestieri

NBER Working Paper No. 21595
Issued in September 2015
NBER Program(s):   DAE   DEV   EFG   PR

We present a new multi-sector growth model that accommodates long-run demand and supply drivers of structural change. The model generates nonhomothetic Engel curves at all levels of development and is consistent with the decline in agriculture, the hump-shaped evolution of manufacturing and the rise of services over time. The economy converges to a constant aggregate growth rate that depends on sectoral income elasticities, capital intensities and rates of technological progress. We estimate the demand system derived from the model using historical data on sectoral employment shares from twenty-five countries and household survey data from the US. Our estimated model parsimoniously accounts for the broad patterns of sectoral reallocation observed among rich, miracle and developing economies in the post-war period. We find that income effects play a major role in generating structural change.

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Document Object Identifier (DOI): 10.3386/w21595

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