Investment and Growth: Half a Century of a Subtle and Frequently Misunderstood Relationship

Sebastián Katz (), Luis Lanteri () and Sebastián Vargas
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Sebastián Katz: Central Bank of Argentina
Sebastián Vargas: Central Bank of Argentina

No 200722, BCRA Working Paper Series from Central Bank of Argentina, Economic Research Department

Abstract: A usual policy recommendation to promote sustained economic growth it to dedicate increasing resources to the investment process (i.e. high investment rates). In contrast, a well known result of neoclassical growth theory is that the only determinant of long run growth is technological progress, not capital accumulation. On the contrary, to postulate that the investment rate has an important role to play in long run growth one needs to assume, as the new theory of growth does, that investment is capable of generating increases in aggregate productivity through externalities or some other form of increasing returns to scale. However, this qualifications are not the ones that are usually invoked when it is claimed that investment is the key ingredient for long run growth, as it is usually asserted in policy debates. It is not the purpose of this paper to deny the existence of the investment growth nexus. In fact, this paper argues that in the case of our economies, because of their important contribution on macroeconomic sustainability, high investment and domestic savings rates can play a crucial role in the consolidation of the growth process. Moreover, although it is not the case of Argentina (as we illustrate quantitatively), this paper also aims to recall that potential intergenerational sub optimal situations of dynamic inefficiency can arise if the investment rate exceeds its optimal level.

Keywords: economic growth; investment rate; productivity; domestic savings (search for similar items in EconPapers)
JEL-codes: D9 E2 O3 O4 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2007-09
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