A test of a modern version of the Solow model

Abstract

This paper suggests a test of an upgraded version of the Solow model which was suggested by Mankiw, Romer and Weil (MRW). MRW upgrade the Solow exogenous growth theory by including human capital. Human capital has been a major variable suggested mainly by endogenous growth models in order to eliminate diminishing returns, the heart of any exogenous growth theory. The MRW exogenous growth theory yields an estimable specification for the determinants of the steady state per capita level of income. The same theory suggests that the growth rate of per capita income depends on savings, human capital and population growth rates as well as the starting per capita income. In this paper we derive a transformation of their model which implies that all that matters for the growth rate is the starting period growth rate. This implied hypothesis is tested but it does not find support by the data. In this context, the rejection of the restriction may be interpreted as evidence against the MRW exogenous growth theory. This paper is part of our wider research on exogenous versus endogenous growth models.