NBER Working Papers and Publications
|April 1999||Technology (and Policy) Shocks in Models of Endogenous Growth|
with Larry E. Jones, Rodolfo E. Manuelli: w7063
Is there a trade-off between fluctuations and growth? The empirical evidence is mixed, with some studies (Kormendi and Meguire (1985)) finding a positive relationship, while others (Ramey and Ramey (1995)) finding the a negative one. Our objective in this paper is to understand how fundamental uncertainty can affect the long run growth rate, and what are the factors that determine the nature (positive or negative) of the relationship. Qualitatively, we show that the relationship between volatility in fundamentals and policies and mean growth can be either positive or negative. We identify the curvature of the utility function as a key parameter that determines the sign of the relationship. Quantitatively, we find that when we move from a world of perfect certainty to one with uncertainty t...
Published: With Peter E. Rossi, published as "Optimal Taxation in Models of Endogenous Growth", Journal of Political Economy, Vol. 101, no. 3 (1993): 485-517.