Capital Mobility in Neoclassical Models of Growth

37 Pages Posted: 13 Jul 2000 Last revised: 1 Jul 2021

See all articles by Robert J. Barro

Robert J. Barro

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

N. Gregory Mankiw

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Xavier Sala-i-Martin

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Date Written: November 1992

Abstract

The empirical evidence reveals conditional convergence in the sense that economies grow faster per capita if they start further below their steady-state positions. For a homogeneous group of economies - like the U.S. states, regions of western European countries, and the GECD countries - the convergence is unconditional in that the poor economies grow faster than the rich ones. The neoclassical growth model for a closed economy fits these facts if capital is viewed broadly to encompass human investments, so that diminishing returns to capital set in slowly, and if differences in government policies or preferences about saving lead to heterogeneity in steady-state positions. Yet if the model is opened to allow for full capital mobility, then the predicted rates of convergence for capital and output are much higher than those observed empirically. We show that the open-economy model conforms with the evidence if an economy can use foreign debt to finance only a portion of its capital, even if 50% or more of the total. The problems in using human capital as collateral can explain the required imperfection in the credit market.

Suggested Citation

Barro, Robert J. and Mankiw, N. Gregory and Sala-i-Martin, Francesc Xavier, Capital Mobility in Neoclassical Models of Growth (November 1992). NBER Working Paper No. w4206, Available at SSRN: https://ssrn.com/abstract=227071

Robert J. Barro (Contact Author)

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N. Gregory Mankiw

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Francesc Xavier Sala-i-Martin

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

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