Title: Using an Error-correction Model to Test Whether Endogenous Long-run Growth Exists
Reference Number: 1128
Publication Date: December 2004
JEL Classifcation: O40, E22

Sau-Him Paul Lau
The University of Hong Kong


A major empirical interest in growth studies is whether permanent changes in economic fundamentals affect the long-run growth rate or not. However, a direct time series analysis of this hypothesis may not always be feasible because the permanence of many such changes is rather questionable. This paper explains why examining the long-run effects of temporary changes in investment share on per capita output provides indirectly the answer regarding the effects of (possibly hypothetical) permanent changes in investment share, when per capita output and per capita investment are cointegrated. Applying the proposed method to the post-war data of major industrial countries, it is found that a disturbance to investment share does not produce a positive long-run effect in each of the four countries—France, Italy, Japan and the UK—in which per capita output and per capita investment are cointegrated. The evidence is unfavorable to the class of endogenous growth models.


Key words: error-correction model; endogenous long-run growth

Last modified: 01/25/2007