How to Predict the Economic Growth Rates of a Country？ A DSGE Model with the Accumulation of Human Capital

ABSTRACT

We propose an endogenous economic growth DSGE model based on human capital accumulation theory. Then we estimate the DSGE model by the Bayesian method, using the economic data of China, the USA, and Japan from 1996: Q1 to 2018: Q4. It is shown that the estimated models can accurately predict the economic growth rates of the three countries and can tightly fit the economic data of the three countries. Therefore, the model proposed can be employed to predict the economic growth of a typical country and to analyse the determinants of its economic growth in the short and long term. We find that levelling up technology in all fields is helpful for economic growth in the short term, and stimulating labour supply, mitigating monopoly in the goods market and labour market, and increasing the contribution of physical capital in goods production are helpful for economic growth in the long term.

KEYWORDS:

• Endogenous growth
• DSGE model
• human capital accumulation
• Bayesian estimation

JEL CLASSIFICATION:

• E12 E62 O4

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Some studies refer to the same process as innovation, but the essence is the same. Therefore, we adopt the accumulation of technological progress to keep things consistent.

² Some studies refer to the same process as disposable science expenditure, disposable transfer, disposable investment or disposable educational expenditure. For consistency, we adopt disposable capital investment.

³ The model parameters estimated can be found in Table 2 of Appendix 3

⁴ $R_{DSGE,j}^2=1-\frac{\sum _{t=0}^T{\left(O{D}_{j,t}-S{D}_{j,t}\right)}^2}{\sum _{t=0}^T{\left(O{D}_{j,t}\right)}^2}$, where $O{D}_{j,t}$ represents the value of variable j in real economic data and $S{D}_{j,t}$ represents the value of variable j in simulated data from the estimated DSGE model.

⁵ https://www.wind.com.cn/

⁶ https://fred.stlouisfed.org/

⁷ https://www.e-stat.go.jp/en

⁸ https://www.oecd.org/sdd/oecdmaineconomicindicatorsmei.htm