Distortions in the Neoclassical Growth Model: A Cross-Country Analysis

No 2013-24, GEMF Working Papers from GEMF, Faculty of Economics, University of Coimbra

Abstract: This paper investigates the properties of distortions that manifest themselves as wedges in the equilibrium conditions of the neoclassical growth model across a sample of OECD countries for the 1970-2011 period. The quantitative relevance of each wedge and its robustness in generating fluctuations in macroeconomic aggregates is assessed. The efficiency wedge proves to be determinant in enabling models to replicate movements in output and investment, while the labor wedge is important to predict fluctuations in hours worked. Modeling distortions to the savings decision holds little quantitative or qualitative relevance. Also, investment seems to be the hardest aggregate to replicate, as prediction errors concerning output and hours worked are typically one order of magnitude smaller. These conclusions are statistically significant across the countries in the sample and are not limited to output drops. Finally, the geographical distance between countries and their degree of openness to trade are shown to contain information with regard to the wedges, stressing the importance of international mechanisms of transmission between distortions to the equilibrium conditions of the neoclassical growth model.

Keywords: Business cycle accounting; Frictions; Economic fluctuations. (search for similar items in EconPapers)
JEL-codes: E27 E30 E32 E37 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2013-11
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Published in Journal of Economic Dynamics and Control, Volume 47, October 2014, Pages 1-19

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Related works:
Journal Article: Distortions in the neoclassical growth model: A cross-country analysis (2014)
Working Paper: Distortions in the Neoclassical Growth Model: A Cross-Country Analysis (2013)
Working Paper: Distortions in the Neoclassical Growth Model: A Cross Country Analysis (2013)
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