Ellen R. McGrattan - Monetary Advisor
AK growth models predict that permanent changes in government policies affecting investment rates should lead to permanent changes in a country’s GDP growth. Charles Jones (1995) sees no evidence for this prediction in data for 15 OECD countries after World War II: rates of investment, especially for equipment, have risen while GDP growth rates have not. This article provides evidence supporting the AK models’ prediction. Data back to the 19th century show a strong positive relationship between investment rates and growth rates and short-lived deviations from trends. A strong positive relationship also exists between average rates of investment and growth in postwar data for a large cross-section of countries. To account for the short-run deviations in rates that Jones highlights, the model he used is extended to allow policies to affect not only investment/output ratios but also capital/output ratios and labor/leisure decisions.
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