Growth outside the stable path: Lessons from the European reconstruction

Francisco Alvarez-Cuadrado ()

European Economic Review, 2008, vol. 52, issue 3, 568-588

Abstract: This paper exploits a natural experiment, the large destruction of capital in continental Europe during World War II, to characterize the transitional dynamics of an economy that begins with a capital stock below its steady state level. We use these regularities as a benchmark to discriminate among competing growth specifications. A model that combines non-separabilities in preferences with a technology that restricts the degree of substitutability between inputs outperforms the widely used AK and Cobb-Douglas specifications with time-separable preferences. Our results suggest that policy evaluations based in growth models that overlook non-separabilities in preferences or impose strong restrictions on the technological structure might be grossly misleading.

Date: 2008
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Working Paper: GROWTH OUTSIDE THE STABLE PATH: LESSONS FROM THE EUROPEAN RECONSTRUCTION (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:52:y:2008:i:3:p:568-588

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