Development accounting with wedges: the experience of six European countries

István Kónya

The B.E. Journal of Macroeconomics, 2013, vol. 13, issue 1, 245-286

Abstract: The paper interprets the growth experience of three Western European countries (France, Germany and the UK) and three Central-Eastern European economies (the Czech Republic, Hungary, and Poland) through the lens of the neoclassical growth model. It combines the methodologies of Development Accounting (Caselli, F. 2005. “Accounting for Cross-Country Income Differences.” In Handbook of Economic Growth, Chapter 9, 679–741.) and Business Cycle Accounting (Chari, V. V., P. J. Kehoe, and E. R. McGrattan. 2007. “Business Cycle Accounting.” Econometrica 75 (3): 781–836.) to calculate distortions – “wedges” – in production efficiency, and in the labor and capital markets. The exercise sheds light on the extent and evolution of factor market distortions between 1996 and 2009. The main result of the paper is that capital and labor market distortions do not explain income differences across the two country groups, but are important to understand income differences within groups. In addition, observed labor and capital taxes are related to the measured wedges, but significant unexplained components remain. Reducing labor and capital market distortions would lead to significant output gains in all countries.

Keywords: business cycle accounting, capital and labor markets, development accounting, distortions, European economies, JEL codes: E13; O11; O47 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (10)

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DOI: 10.1515/bejm-2012-0153

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