How much do distortions affect growth? Easterly, William

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Easterly, William
Appears In
Journal of Monetary Economics
Economic development -- Models; Prices -- Economic aspects; Models
Academic; Trade
An endogenous growth model having two types of capital demonstrates the effects of relative input price distortions on growth and welfare. The effect's magnitude depends on the production elasticity of substitution while subsidized inputs and investment goods can increase growth despite the ill effects on welfare. However, a subsidy to a single capital good financed by a tax on another good lowers growth. Results show adverse effects of the variance of investment goods' relative prices across sectors. In addition, penalizing investment goods and distorting financial markets lowers growth.
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