E13 - General Aggregative Models: NeoclassicalReturn

The balanced growth theory and the neoclassical growth model predict that certain macroeconomic variables such as output, consumption, and investment grow at a constant rate. Analytically, it indicates that the consumption-output ratio and the investment-output ratio (termed "great ratios") must be stationary. Moreover, consumption and investment must be cointegrated with output. This paper examines these implications with respect to developed (G7) and emerging (E7) countries using data for the period 1970-2019. The validity of the balanced growth hypothesis (BGH) is tested by using unit root tests (univariate analysis) and cointegration techniques (multivariate analysis) that permits endogenously determined structural breaks. The findings of our univariate analysis suggest limited evidence of the BGH in developed and developing countries. The multivariate analysis exhibits more supportive evidence of the BGH in five developed countries and limited evidence for two developing countries. The study also employs the Westerlund (2006) panel cointegration test with structural breaks to examine the validity of the BGH. Empirical findings validate the BGH for the G7 countries, while it is not validated for E7 countries. In sum, the study promulgates the use of structural breaks in a multivariate setup in testing the BGH to find robust evidence.

The aim of this paper is to question the scenario with legal tender law by an analysis of potential competition of alternative currencies. To accomplish such a goal, this study offers an original version of the dynamic macroeconomic model based on the money in the utility function. This model compares the current monetary conditions with the potential situation permitting more currencies circulating alongside. The main assumption about individuals' preferences over stable currencies underlines the whole paper with emphasis on the mathematical model. The outcome of the model reveals lower inflation rate in scenario with competition among currencies in comparison to the present scenario. This result by itself seems to favour the idea of an exclusion of legal tender clause and allowance of free currency competition. The final simulation of the model, using statistical software, brings to this so far "unambiguous" view scepticism due to possible difficulties during the discovery process.