SHOCKS AND GROWTH: FOUR ESSAYS İBRAHİM HAKAN YETKİNER

SHOCKS AND GROWTH: FOUR ESSAYS İBRAHİM HAKAN YETKİNER

Labyrint Publication P.O. Box 662 2900 AR Capelle a/d Ijssel The Netherlands Fax: +31 (0) 10 284 7382 2003, İbrahim Hakan Yetkiner All rights reserved. No part of this publication may be reprinted or utilized in any form or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without written permission from the copyright owner. ISBN 90-5335-016-0 Printed by: Ridderprint, Ridderkerk

Rijksuniversiteit Groningen SHOCKS AND GROWTH: FOUR ESSAYS Proefschrift ter verkrijging van het doctoraat in de Economische Wetenschappen aan de Rijksuniversiteit Groningen op gezag van de Rector Magnificus, dr. F. Zwarts, in het openbaar te verdedigen op donderdag 9 oktober 2003 om 16 uur door İbrahim Hakan Yetkiner geboren op 6 maart 1965 te Izmit (Turkije)

Promotores: Co-promotor: Prof. dr. mr. C.J. Jepma Prof. dr. S. Brakman Dr. A. de Vaal Beoordelingscommissie: Prof. Dr. B. van Ark Prof. Dr. H. Garretsen Prof. Dr. J. Muysken

This study is dedicated to the victims of human rights violations

Acknowledgments This thesis contains part of my research I conducted as a Ph.D. student (aio) at the University of Groningen, Department of Economics, during the period 1998-2002. Many people from many universities have been of great help during my research. First of all, I would like to thank Catrinus Jepma, Steven Brakman, and Albert de Vaal not only for their guidance and insight throughout the four years but also for their confidence in me. While keeping a strong support on my research efforts, they also gave me a chance to learn how to conduct research during four years. Without their trust, this work would have never been materialized. I would like to also thank the examining committee consisting of Joan Muysken, Bart van Ark, and Harry Garretsen for reading the entire manuscript and providing helpful comments. Second, I would like to thank Adriaan van Zon, Joan Muysken, and Thomas Ziesemer of MERIT and the Department of Economics at Maastricht University for their full support since I have been in the Netherlands. Joint research with them gave me the opportunity to gain not only a momentum in my profession but also their friendship that I will always keep as a valuable asset. Third, many people including Hong Bo, Marco Haan, Ben Heijdra, Jacob de Haan, Jan Jacobs, Peter Kooreman, Gerard Kuper, and Linda Toolsema provided helpful comments on my works, included in this manuscript or not, and contributed substantially to advance myself in my profession. vi

Fourth, I would like to thank (i) the SOM bureau that have unlimited energy in supporting Ph.D. students; (ii) NAKE organizers; and (iii) our departmental secretary Heidi Scholtz, the library staff, and all other personnel of the Faculty for their help. Finally, I would like to thank my wife and my son for their constant belief in me and for their endless support. They suffered a lot during these four years from my regular mental and physical absence that I cannot compensate by any means. I hope this material evidence can partly alleviate that. İbrahim Hakan Yetkiner vii

Contents ACKNOWLEDGEMENTS... vi LIST OF TABLES... xi LIST OF FIGURES... xii 1 PROLOGUE... 1 1.1 INTRODUCTION... 1 1.2 DEFINING SHOCKS IN THE GROWTH CONTEXT... 4 1.2.1 Natural Shocks... 9 1.2.2 Market Shocks... 16 1.2.3 Policy Change Shocks... 30 1.3 THE PLACE OF THIS DISSERTATION IN THEORY ON SHOCKS... 36 1.4 CONCLUSION... 50 2 AN ENDOGENOUS GROWTH MODEL WITH EMBODIED ENERGY-SAVING TECHNICAL CHANGE... 53 2.1 INTRODUCTION... 53 2.2 THE MODIFIED ROMER MODEL... 61 2.3 POLICY IMPLICATIONS... 78 2.4 CONCLUSION... 87 3 THE CYCLICAL ADVANCEMENT OF DRASTIC TECHNOLOGIES... 93 3.1 INTRODUCTION... 93 3.2 THE MODEL... 97 3.3 THE VERY LONG-RUN... 110 3.4 CONCLUSION... 122 viii

4 PHYSICAL SHOCKS ON ECONOMIC STRUCTURE: EARTHQUAKE AND GROWTH... 123 4.1 INTRODUCTION... 123 4.2 THE BASICS... 131 4.3 A THREE-SECTOR GROWTH MODEL... 134 4.3.1 Short-Run Equilibrium... 135 4.3.2 Long-Run Equilibrium... 140 4.3.3 Stability Analysis... 143 4.3.4 More on the Transitional Dynamics... 145 4.4 IMPLICATIONS OF CATASTROPHIC EARTHQUAKES... 147 4.4.1 Transitional Implications of an Earthquake on Housing... 149 4.4.2 Long-Run Effects of an Earthquake... 155 4.5 CONCLUSION... 160 5 IS RECOVERY DEFINITE AFTER PHYSICAL SHOCKS? A THEORETICAL ELABORATION... 163 5.1 INTRODUCTION... 163 5.2 THE BASICS... 167 5.3 THE MODEL... 171 5.3.1 Restoring Constancy Conditions... 174 5.4 CONCLUSION... 181 6 EPILOGUE... 183 6.1 INTRODUCTION... 183 6.2 A SUMMARY OF FINDINGS... 184 6.3 HINTS FOR FUTURE RESEARCH... 190 ANNEX A... 193 ANNEX B... 195 ANNEX C... 199 ANNEX D... 201 ANNEX E... 209 ANNEX F 215 ix

BIBLIOGRAPHY... 221 SAMENVATTING (DUTCH SUMMARY)... 237 x

List of Tables TABLES 1.1 THE IMPACT OF SHOCKS IN SOLOW FRAMEWORK... 21 1.2 THE IMPACT OF SHOCKS IN BARRO (1990)... 35 1.3 THE ASSOCIATION OF CHAPTERS WITH THE REVIEW... 37 4.1 IMPLICATIONS OF QUALITY IMPROVEMENTS IN HOUSING (MEASURED VIA CHANGES IN BEHAVIORAL VARIABLES)... 157 4.2 IMPLICATIONS OF QUALITY IMPROVEMENTS IN HOUSING (MEASURED VIA CHANGES IN THE DEPRECIATION RATE)... 159 xi

List of Figures FIGURES 1.1.a THE CAPITAL PATH... 14 1.1.b MARGINAL PRODUCTIVITY OF CAPITAL... 14 1.2 THE NEOCLASSICAL GROWTH MECHANISM... 18 1.3 TECHNOLOGY SHOCKS IN THE SOLOW FRAMEWORK... 19 1.4 TECHNOLOGY SHOCKS IN THE AK MECHANISM (IN A SOLOW SETUP)... 24 1.5 SHOCKS IN THE ENDOGENOUS TECHNOLOGICAL CHANGE SETUP... 29 1.6 GOVERNMENTAL SHOCKS (IN BARRO (1990) SETUP)... 34 1.7 THE TIME PLOT OF GROWTH OF FOSSIL FUEL COMPOSITE PRICES AND GDP 41 1.8 CUMULATIVE DISTRIBUTION IMPACT OF DRASTIC INNOVATIONS... 44 1.9 DRASTIC INNOVATION ACTIVITY, 1800-1968... 44 1.10 THE TURKISH GDP GROWTH RATE, 1991-2000... 47 2.1 STEADY STATE EQUILIBRIUM... 76 2.2 THE SUSTAINABLE GROWTH CONE... 80 3.1 ASSOCIATING INVENTIONS WITH REAL TIME... 112 3.2 TWO POSSIBLE PATHS OF THE BROADER CONCEPT OF OUTPUT... 121 4.1 GLOBAL STABILITY IN THE AUGMENTED UZAWA MODEL... 144 4.2 MARGINAL RESPONSE PATH OF HOUSING TO A CHANGE IN S H... 151 4.2 MARGINAL RESPONSE PATH OF HOUSING TO A CHANGE IN S I... 152 5.1 RESTRICTION OF UNDISTURBED VARIABLES... 176 D.1 CONVERGENCE WHEN k=1... 205 D.2 CONVERGENCE WHEN k=2... 206 D.3 CONVERGENCE WHEN k=3... 206 xii