Chapter 1 Neoclassical Models of Endogenous Growth: The Effects of Fiscal Policy, Innovation and Fluctuations

Despite its role as the centerpiece of modern growth theory, the Solow model is decidedly silent on some of its basic questions: Why is average growth in per capita income so much higher now than it was 200 years ago? Why is per capita income so much higher in the member countries of the OECD than in the less developed countries (LDC) of the world? In this chapter we review the recent literature on endogenous growth. We concentrate on convex models and we restrict attention to the case in which markets are competitive. After a brief review of the basic mechanisms that produces growth, we concentrate on three topics: the impact of fiscal policies on growth, the role of innovation and the relationship between uncertainty and growth.