Economic Growth and Innovation Complexity: An Empirical Estimation of a Hidden Markov Model

What is it about?

Over the past decades, research effort in high income countries has substantially increased. Meanwhile, the growth rates of per capita output have been rather stable. The contribution of this paper is twofold. The first is to provide a theoretical explanation for such trends by developing an R&D-based growth model which accounts for dilution, diffculty and duplication effects. The second is to show empirically that the occurrence of different phases in the economic growth dynamics traces back to the interplay between complexity and specialization in production. To do this we estimate a Hidden Markov Model in which countries can switch across different growth regimes. We identify four distinct growth regimes. These regimes capture different balanced growth paths, with different long-run average growth and different growth volatility. Typically, higher long-run economic growth rates are found associated to higher saving and investment rates and to lower levels of public expenditure to GDP ratio. Moreover, for those countries stuck in a low growth regime, public policies improving the overall education attainment and/or oriented to stimulate a higher population growth rate increase the probability to move towards higher growth regimes.

Featured Image