Long-Term Growth and Persistence with Endogenous Depreciation: Theory and Evidence

Abstract

Previous research has shown a strong positive correlation between short-term persistence and long-term output growth as well as between depreciation rates and long-term output growth. This evidence, therefore, contradicts the standard predictions from traditional neoclassical or AK-type growth models with exogenous depreciation. In this paper, we first confirm these findings for a larger sample of 101 countries. We then study the dynamics of growth and persistence in a model where both the depreciation rate and growth are endogenous and procyclical. We find that the model s predictions become consistent with the empirical evidence on persistence, long-term growth and depreciation rates.