15 years of new growth economics: What have we learnt?
Paul Romer's paper "Increasing Returns and Long Run Growth" is now 15 years old. This path-breaking contribution led to a resurgence in research on Economic Growth. The new literature has made a number of important contributions. One of the main ones, perhaps the main one, is that it has shifted the research focus of macroeconomists. From the time Lucas, Barro, Prescott and Sargent led the rational expectations revolution until Romer, Barro and Lucas started the new literature on economic growth, macroeconomists devoted virtually zero effort to the study of long-run issues and they were all doing research on business cycle theory. And, in this sense, the new growth theory represented a step in the right direction. The new growth literature has had a similar impact on macroeconomics classes and textbooks. Up until 1986, most macroeconomics classes and most macroeconomic textbooks either relegated economic growth to play a marginal role or they neglected it altogether. Things are very different now. Modern undergraduate textbooks devote more than a third of their space to economic growth and most macroeconomic classes (graduate and undergraduate) devote a substantial amount of time to this important subject. The impact of these two changes on the training of new young economists is very important, and this should be viewed as another contribution of the new economic growth literature. But the contributions I wish to highlight in this conference are the substantial ones: I want to discuss the most significant ways in which the new economic growth literature has expanded our understanding of economics.
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