Growth Enhancing Policies in a Small Open Economy

Anders Sørensen

No 96-04, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: R&D subsidies as well as tariffs/export subsidies are often argued to promote economic growth. This paper investigates such unterventions in a model of endogenous growth in which (a) skills are acquired through time spent in learning and 8b) the engine of long-run growth is market-driven R&D performed by skilled labour. Consequently, the levels of unskilled and skilled labour supplied to the production side of the economy are determined endogenously. For the small open-economy case, the model predicts that the steady state growth rate is unaffected by R&D subsidies. On the other hand, the long run growth rate is affected by trade policy. this suggests that trade policy can have long run growth effects whereas R&D subsidies cannot.

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