Drivers and impacts of economic growth

Advanced Systems Analysis (ASA) Program researchers develop and study stylized economic growth models and advance methods of the optimal control theory needed to analyze such models, also taking inherent uncertainties into account. Long-term economic growth is driven by the dynamics of natural, physical, and human capital and is subject to feedback with the environment.

© Spayth | Dreamstime

© Spayth | Dreamstime

Long-term economic growth depends on the dynamics of production factors, such as natural, physical, and human capital, as well as on other inputs, notably, environmental feedback. The closer humanity gets to planetary boundaries, the stronger the effect of environmental feedback on human economic activity. This necessitates the development of new economic growth models capable of generating solutions related to green growth and sustainable development, taking into consideration, inter alia, nonlinear dynamic feedbacks and inherent uncertainties.

ASA studies made progress in the methodology by furthering the theory of optimal control for infinite-horizon problems, addressing classes of problems that are typical for economic applications, in which traditional methods fail to deliver constructive conditions for optimality [1][2].

In addition, ASA researchers developed a number of stylized models addressing particular aspects of sustainability. Namely, a multi-sector dynamical extension of computable general equilibrium models was developed [3]; using this modeling framework, the researchers analyzed a ten-sector economy case study reproducing real historical patterns of industrial dynamics. Another multi-sectorial growth model, which balanced proportions between production factors, was used to show that, when production functions were homogeneous, the dynamics could be simplified and analytical solutions for optimal investments in production factors could be derived [4]. The developed modeling framework was then applied to China’s economy [5].

The effect of globalization on wages and welfare is a controversial issue that was investigated by ASA researchers using a general equilibrium model of international trade with partly oligopolistic markets [6]. The authors of the study found that both a shift from national to international regulation and a decrease in trade costs promoted aggregate welfare, but decreased open-sector relative wages.

A growth model with physical and human capital as drivers was considered in [7], and an optimal trajectory was constructed using non-linear stabilizers previously developed by ASA researchers. The model, calibrated for US data, showed quite a good fit with the historical path, including the slowing down of the economy in the last decades. Investment constraints became active on some parts of the optimal trajectory, highlighting the importance of taking them into consideration when modeling economic growth, a factor that is often ignored in applied studies.

The influential Lucas model—which assumes that households optimally allocate consumption and education over the life-cycle given exogenous interest rate and wages—was revisited in an ASA study [8]. The authors showed that, in contrast to the original general equilibrium framework, in which an agent always chooses part-time education and work, in this partial equilibrium framework there are infinitely many optimal solutions. For example, an individual might find it optimal to allocate her whole available time to education at the beginning of her life and to focus on labor supply only when she is older.

References

[1] Aseev SM & Veliov VM (2015). Maximum principle for infinite-horizon optimal control problems under weak regularity assumptions. Proceedings of the Steklov Institute of Mathematics 291(1):22-39.

[2] Aseev SM (2015). On the Boundedness of Optimal Controls in Infinite-Horizon Problems. Trudy Matematicheskogo Instituta imeni VA Steklova 291:45–55 [in Russian]; English translation: Proceedings of the Steklov Institute of Mathematics 291:38–48.

[3] Jensen BS, Lehmijoki U, Rovenskaya E (2015). Non-Homothetic Multisector Growth Models. Review of Development Economics 19(2):221–243.

[4] Kryazhimskiy AV & Tarasyev AM (2015). Optimal control for proportional economic growth. Proceedings of the Institute of Mathematics and Mechanics 21(2):115-133 [In Russian].

[5] Kryazhimskiy AV, Tarasyev AM, Usova AA & Wang W (2015). Proportional Economic Growth under Conditions of Limited Natural Resources. Proceedings of the Steklov Institute of Mathematics 291:127–145.

[6] Palokangas T (2015). The welfare effects of globalization with labor market regulation. IZA Discussion Paper No.9412, IZA, Bonn, Germany.

[7] Sanderson W, Tarasyev A & Usova A (2015). Optimal Two Sector Growth Models with Three Factors. Review of Development Economics 19(1): 85–99.

[8] Skritek A, Crespo Cuaresma J, Kryazhimskii AV, Prettner K, Prskawetz A & Rovenskaya E (2015). Revisiting the Lucas model. ECON WPS-Vienna University of Technology Working Papers in Economic Theory and Policy.

Collaborators

World Population Program (POP), IIASA

Institute of Mathematics and Mechanics, Ural Branch of Russian Academy of Sciences, Russia

University of Helsinki, Finland

University of Southern Denmark, Denmark

Vienna University of Technology, Austria

Vienna University of Economics and Business, Austria

Tsinghua University, China


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Last edited: 15 March 2016

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Advanced Systems Analysis

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