The Augmented Solow Model and the Productivity Slowdown

Abstract

In an insightful and influential paper, Mankiw, Romer and Weil (1992) have suggested that an augmented Solow growth model can account for 80% of the variation in output per capita across countries due to different steady-state growth paths that result from differences in saving rates, education, and population growth. This paper carries their analysis one step further and asks whether changes in the growth rate between the 1960s and the 1980s can also be explained by this framework. Our results provide further support for several of Mankiw, Romer and Weil's key conclusions--investment in physical capital, population growth, and the initial levels of output seem to matter a great deal. However, investment in human capital has no ability to account for changes in growth rates over time. We conclude that investment in physical capital seems to be quite important for economic growth, though the reasons for this importance may not be fully captured by the augmented Solow growth model.

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JEL Classification: E22, E23, O41