Endogenous Technological Progress and the Macroeconomy: Stagnation, Low Interest Rates and the Productivity Slowdown

Research output: ThesisDoctoral ThesisCollection of Articles

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Abstract

This dissertation consists of an introductory chapter and three self-contained essays which share the common theme of endogenous technological progress in macroeconomic models. The first essay presents a model of a currency union with nominal rigidities and endogenous growth in which pessimistic expectations can generate permanent slumps. Stagnation evolves as a growth trap under constraints on the central bank's policy rate: Monetary policy cannot restore full employment since weak growth depresses aggregate demand, pushing the policy rate against the constraint. Growth is low in turn as weak demand reduces firm profits and R&D investment. The currency union can settle in a stagnation steady state at the zero lower bound in which stagnation prevails on the monetary union level. A sufficiently small member state can idiosyncratically face stagnation while the rest of the currency union maintains full employment and sound technology growth when the central bank is constrained by its responsibility for the aggregate. Bilaterally implemented R and D subsidies can prevent stagnation in the currency union. Essay 2 analyses the procyclicality of euro area total factor productivity and its role in business cycle amplification by estimating a medium-scale DSGE model with endogenous technology growth on euro area data. The endogenous TFP mechanism induces a high degree of persistence in the euro area business cycle via a feedback mechanism between overall economic conditions and productivity-enhancing investments. Decelerating innovation due to a fall in R and D efficiency constitutes a key driver of the euro area productivity slowdown pre-crisis. As of 2008, a crisis-induced drop in technology adoption is identified the most important factor. The response of inflation is dampened under endogenous productivity dynamics, helping explain both the negligible fall in euro area inflation during the crises and its sluggish increase in the subsequent recovery. In the third essay, I propose a two-sector endogenous growth model with heterogeneous sectoral productivity and nonlinear hiring costs to analyse the link between stagnant wages, sectoral resource misallocation and low productivity growth. An upward shift in employment, triggered for instance by a labor market reform, raises long-run growth of technology, productivity and real wages. In the initial phase, however, productivity and real wages stagnate as employment increases disproportionally in the low-productivity sector. Due to the inherent growth externality the competitive equilibrium is not efficient as firms fail to internalize the effect of their individual labor allocation on aggregate growth. Subsidies to high-productivity sector production can alleviate welfare losses along the transition path. JEL codes: E20, E22, E24, E32, E40, E52, O30, O42

Details

Original languageEnglish
QualificationDoctor's degree
Awarding Institution
Supervisors/Advisors
Publisher
  • Aalto University
Print ISBNs978-952-60-8733-7
Electronic ISBNs978-952-60-8734-4
Publication statusPublished - 2019
MoE publication typeG5 Doctoral dissertation (article)

    Research areas

  • stagnation, monetary policy, low interest rates, endogenous productivity dynamics, technology growth, productivity slowdown

ID: 37538536