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Title:Can the composition of capital constrain potential output? A gap approach PDF Logo
Authors:Albala-Bertrand, Jose Miguel
Issue Date:2004
Series/Report no.:Working Paper, Department of Economics, Queen Mary, University of London 510
Abstract:Focusing on core-infrastructure capital vis-à-vis productive capital, we propose a macroeconomic method to determine both which type of capital shortage would be constraining potential output and what would be the optimal composition, or optimal ratio between these two types, of capital in any given period. This method is based on an adapted two-gap model, estimated via linear programming, and illustrated with the cases of Chile and Mexico over the 1950-2000 period. The results show that there appears to be an oscillating pattern over this period, with either type of capital shortage alternating each other. The results also show that, optimally, core infrastructure appears to support a variable level of productive investment over time. However, the shortage of productive capital would at least be as important as that of infrastructure capital, suggesting an optimal trade off between the two. That is, the social opportunity cost of investing in either type of capital would be determined by the gap between the optimal growth rates estimated from these two types of capital. For either type of capital, a macroeconomic shortage would mean that the economy as a whole is in a net state of shortage.
Subjects:Capital shortage, Potential output, Two-gap model, Linear programming
JEL:E12
O11
O41
O54
C61
Document Type:Working Paper
Appears in Collections:Working Paper Series, School of Economics and Finance, Queen Mary, University of London

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