Testing Solow's Implications on the Effective Development Policy

Testing Solow's Implications on the Effective Development Policy
Jeong, Hyeok
Capital investment; Diminishing return; TFP; Human capital; Development policy; Development effectiveness
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KDI Working Paper Series;WP13-07
The core of the neoclassical growth theory is the capital investment. Solow proposed that the diminishing return is key to such growth process in establish- ing the stability of the equilibrium growth path. This key postulation has critical implications on the sustainable and e¤ective development policy, suggesting the im- portance of productivity and human capital in both steady-state and capital-driven transitional growth. This paper suggests a novel way to test the diminishing return assumption and con rmed its strong presence using the Penn World Tables version 8.0 data, hence validates Solow s implications on e¤ective development policies.
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