Solow Model

3. Solow Model • Calibrated to a SAM for 1950 • Usual assumptions • Written in Excel for transparency (instead of GAMS) • Interpretation and changes are straightforward • Produces a counterfactual

5. Structuralist Model • Calibrated to the same SAM • Uses capacity generated by Solow model

6. Investment function • u: capacity utilization u = X/Q • X: aggregate demand • Expected rate of profit relative to the cost of capital

7. Expected profit rate Last period’s profit rate plus a random error term (uniform distribution) rt = rt-1+ ε

8. Aggregate Demand • X = X(u; ρ*,ρ)+εwhere • ρ∗ foreign savings • ρ govt investment less govt savings • ρ* and ρ are “shocks” (in terms of % of GDP) • Supply determined by Solow model

9. Labor Market • Supply: exogenous growth rate • Demand: follows productivity and real wages • Walrasian adjustment with lag

10. The Shocks Two ways to model them • Historical trend (average rate of growth) • Actual data (year by year)

11. Trend shocks

12. Actual Foreign (trend fiscal)

13. Actual Fiscal and Foreign

14. Conclusion • Fiscal policy stabilizing until late 1980s- 1990s. • Se vayan todos: classic government failure ∙ • Argentina and Washington Consensus

15. Households • 75 households (1950) to 234 households (2000) • Two labor categories: Skilled and unskilled

16. To enter the skilled labor market • Requires “skill” obtained through • Education or previous experience • Luck

17. Points system • All labor contracts are renegotiated each period • Education one point • Experience Lt = 1+(1/Lt-1) • Recent experience (last period) • Luck (according to a random variable)

18. Household Decision Rules

19. Employer’s Decision

20. Simulation Design • Excess supply of skilled labor • Some skilled labor bias built into the model • A worker without skill can at best equal a worker with skill (never preferred).

22. Trend shocks with HH block

24. Trend Fiscal Actual Foreign

39. Income Distribution