Is there endogenous long-run growth?: Evidence from the U.S. and the U.K

The key feature of endogenous growth models is that they imply that permanent changes in government policy can have permanent effects on growth rates. In this paper, we develop and implement an empirical framework to test this implication. In a regression of growth rates on current and lagged policy variables, the sum of the slope coefficients for each policy variable should be nonzero (zero) for endogenous (exogenous) growth models. In our estimation, we use time series data spanning up to 100 years for the United States and 160 years for the United Kingdom. We find that the implication for exogenous growth is usually rejected when both a tax variable and a public capital variable are included in the regression; failing to include both variables biases the results in favor of exogenous growth models. Our findings show that it is possible to have exogenous growth even when U.S. and U.K. GDP growth rates appear to be stable over time. We conclude that at the aggregate level, the production function appears to exhibit constant returns to scale in reproducible inputs.