Externalities and Interdependent Growth: Theory and Evidence

Abstract

I formulate and estimate a model of externalities within countries and technological interdependence across countries. I find that external returns to scale to physical capital within countries are 8 percent; that a 10 percent increase of total factor productivity of a country's neighbors raises its total factor productivity by 6 percent; and that a 2 percent annual growth rate of labor productivity can be explained as an endogenous response to an exogenous 0.2 percent annual growth rate of total factor productivity in the steady--state.