Industry Dynamics and Aggregate Stability over Transition

This paper presents an endogenous growth model of directed technical change with vertical and horizontal R&D to study an analytical mechanism that is consistent with the coexistence of aggregate stability and structural change. We focus on changes in the share of the high- versus the low-tech sectors in the context of a slow, but flexible, transitional dynamics that arises from a dynamic system with a three-dimensional stable manifold. Under the hypothesis of a positive shock in the proportion of high-skilled labour, the technological-knowledge bias channel leads to nonbalanced sectoral growth, while the aggregate variables remain approximately constant and thus consistent with the Kaldor facts. With prevailing market-scale effects, a calibration exercise shows that the model is able to account for around two-thirds of the increase in the share of the high-tech manufacturing sectors observed in European data from 1995 to 2007.