DP542 | Persistent Differences in National Productivity Growth Rates with a Common Technology and Free Capital Mobility

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The paper develops a two-country endogenous growth model to investigate possible causes for the existence and persistence of productivity growth differentials between nations, even though these countries show a common technology, constant returns to scale and perfect international capital mobility. Private consumption is derived from a three-period overlapping generations specification. The source of productivity (growth) differentials in our model is the existence of a non-traded capital good (`human capital') whose augmentation requires a non-traded current input (time spent by the young in education rather than leisure). We consider the influence on productivity growth differentials of private thrift, public debt, the taxation of capital and savings and of policy towards human capital formation.