Externalities and Growth Accounting

Abstract

We reexamine several bodies of data on the growth of output, labor, and capital, within the context of a model that admits the possibility of an externality to the capital input. The model is an augmented version of Paul Romer's (1987) reformulation of the Solow model. Unlike Romer, however, we find no evidence of an externality to capital. This finding implies nothing about the size of possible spillovers in the creation of knowledge because in our model, causality runs exclusively from knowledge to capital.