Supply Side Structural Change

Growing economies often exhibit constant growth rates, constant interest rates, and an increasing urban share of their population. We show that the equilibrium path triggered by a capital-biased technological revolution can account for these regularities. This type of technological change can generate an aggregate production function that displays linear segments. As the economy moves along those segments, the interest rate and the growth rate are constant, and labor is gradually reallocated from the old (rural) techniques to the new (urban) techniques. The model predicts that developed countries must experience a sudden slowdown in their growth rates once their structural change is completed. Productivity, as measured by the Solow residuals, also displays a growth slowdown. Cross-country evidence supports these predictions of the model.

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