| The Institute for Economic Development at Boston University -------- ------------------------Research Review Spring 2001 |
|
“Transition
Dynamics in Vintage Capital Models: Explaining the Postwar Catch-Up of
Germany and Japan” What explains the postwar economic growth miracles of Germany and Japan? Traditional explanations based on a catch-up story owing to low initial capital stocks relative to current technological opportunities have been explored but found wanting. According to the standard neoclassical growth model, such a process of catch-up through capital deepening implies high initial rates of investment, rising capital-output ratios and simultaneously high rates of growth in productivity and capital (relative to labor). In contrast, both Germany and Japan’s postwar experience is characterized by low rates of investment, an initial decline in the capital-output ratio and delayed growth in capital relative to labor productivity. That model, therefore, fails to provide an adequate understanding of the underlying forces explaining the postwar catch-up of these countries with output and productivity standards in the USA. In this paper, Gilchrist and Williams argue that the observed patterns of these macroeconomic variables are consistent with a richer version of the neoclassical growth model that allows for a putty-clay production technology and capital accumulation with embodied technological change. Gilchrist and Williams enrich the standard growth model to allow for a production technology where the capital-labor ratios of existing vintages of machines are rigid. Such rigidities imply binding capacity constraints and rapidly rising marginal costs at the onset of an expansion. As a result, in early stages of the (postwar) catch-up, investment is directed at adding new machines with relatively low capital intensity. Such capital widening allows for a rapid expansion of employment and output at relatively low rates of investment. As capacity expands, employment rises, and output growth outpaces growth in the capital stock. As a consequence, the capital-output ratio falls for a substantial period of time and the economy shows no evidence of “capital deepening” in the initial transition period. In the longer run, the process switches to one corresponding to capital |
deepening: raising the quantity of capital per worker. During
this latter stage therefore, capital serves as a substitute for labor and
the capital-labor ratio increases rapidly. Their model, thus, naturally
admits a distinction between investment on extensive and intensive margins
that is entirely absent from the standard neoclassical model. In addition to putty-clay production, the authors emphasize embodied technological change as a source of rapid growth for Germany and Japan in the postwar period. Such technological growth opportunities reflect the outdated nature of the existing war-time capital stock. According to their model, an improvement in technology embodied in new capital goods also implies an initial phase of capital widening followed by a later phase of capital deepening. It also implies rapid productivity growth owing to the fact that new machines embody “best-practice” technologies. Gilchrist and Williams simulate the model to test its predictive performance against historical data on patterns of capital accumulation and growth in postwar Germany and Japan. Their results indicate that a combination of capital destruction (of the magnitude that occurred in these countries during the war) and embodied technological change are key elements in explaining the postwar transition dynamics such as declining capital-output ratios in the first phase of recovery that corresponds to capital widening (in the 1950s), and its gradual recovery in the subsequent phase of capital deepening (in the 1960s and 1970s). Allowing for a gradual phasing in of embodied technology combined with capital destruction also captures the major features of capital and productivity dynamics during the postwar transition resulting in a striking improvement over earlier models as evidenced in their model’s success at generating plausible dynamics for real rates of return on investment. An important implication of Gilchrist and Williams’ analysis lies in the reinterpretation of these “economic miracles” as a closing of the gap in “machines”. That is, in the postwar period, Germany and Japan regained access to advanced technologies embodied in capital goods available from the USA and elsewhere, and this process was slowed by the putty-clay nature of capital. |
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