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Working Paper Summaries (WP/93/1 - WP/93/54)
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Summary of WP/93/11: “Capital and Trade as Engines of Growth in France: An Application of Johansen’s Cointegration Methodology”

Author(s):
International Monetary Fund
Published Date:
August 1993
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The importance of trade and capital as determinants of trend or potential economic growth is widely acknowledged. Empirical studies of the determinants of output based on aggregate production functions, however, rarely incorporate any variable to capture the impact of trade. Empirical studies have also usually focused only on a narrow definition of capital, typically the business sector capital stock. This paper presents new estimates of an aggregate production function for France, focusing on the role of trade and the importance of capital accumulation by government, households, and businesses, including their expenditures on research and development.

The production function is estimated with recent cointegrating techniques suggested by Johansen (1988, 1989). The cointegrating methodology emphasizes the identification of long-run relationships and, hence, is particularly appropriate for the study of the determinants of trend or potential output. The empirical results suggest that increased trade within the European Community has spurred efficiency and productivity in France. They also indicate that, in addition to the stock of business sector capital, the stock of government infrastructure capital, the stock of residential capital, and the stock of research and development capital have contributed to the growth of output in France.

The estimated production function is used to calculate potential output. These calculations indicate that trade and capital--broadly defined--account for all of the growth in the French economy in the last two decades. Although labor input is also an important determinant of output, it made no contribution to growth during 1971-91. Thus, over the past two decades trade and capital have been the engines of growth in France. The growth of potential output is estimated to have averaged 3 ¼ percent a year in 1987-91; this figure is projected to decline to slightly less than 3 percent a year in 1992-97. To foster more robust growth, France must encourage capital accumulation, implement labor market policies to reduce unemployment, and take steps to revitalize the trade-liberalization process.

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