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Investment demand and structural change

Manuel García-Santana (), Josep Pijoan-Mas () and Lucciano Villacorta

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: In this paper we study the joint evolution of the investment rate and the sectoral composition of developing economies. Using panel data for several countries in different stages of development we document three novel facts: (a) both the investment rate and the industrial weight in the economy are strongly correlated and follow a hump-shaped profile with development, (b) investment goods contain more domestic value added from industry and less from services than consumption goods do, and (c) the evolution of the sectoral composition of investment and consumption goods differs from the one of GDP. We build and estimate a multi-sector growth model to fit these patterns. Our results highlight a novel mechanism of structural change: the evolution of the investment rate driven by the standard income and substitution effect of transitional dynamics explains half of the hump in industry with development, while the standard income and relative price effects explain the rest. We also find that the evolution of investment demand is quantitatively important to understand the industrialization of several countries since 1950 and the deindustrialization of many Western economies since 1970.

Keywords: Structural change; investment; growth; transitional dynamics (search for similar items in EconPapers)
JEL-codes: E23 E21 O41 (search for similar items in EconPapers)
Date: 2019-08
New Economics Papers: this item is included in nep-his and nep-mac
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Related works:
Working Paper: Investment Demand and Structural Change (2019) Downloads
Working Paper: Investment Demand and Structural Change (2016) Downloads
Working Paper: Investment Demand and Structural Change (2016) Downloads
Working Paper: Investment Demand and Structural Change (2015)
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