Structural Change in Investment and Consumption: A Unified Analysis

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Abstract

The structural-change literature typically assumes that investment is produced in manufacturing. We establish that this assumption is counterfactual: in the postwar US, the share of services value added in investment expenditure has been steadily growing. We develop a new model that features structural change in investment and consumption, characterize its equilibrium properties, and provide empirical support for it. We establish that modelling structural change in investment leads to three novel insights: constant TFP growth in all sectors is inconsistent with the existence of aggregate balanced growth with structural change; the sector with the slowest TFP growth absorbs all resources asymptotically; technical change is endogenously investment-biased.

Bibliographical metadata

Original languageEnglish
Pages (from-to)1311–1346
Number of pages36
JournalReview of Economic Studies
Volume88
Issue number3
DOIs
Publication statusPublished - 22 May 2021

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