Andreas Müller, University of Oslo – Københavns Universitet

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Andreas Müller, University of Oslo

"A theory of structural change that can fit the data"

Abstract

This paper proposes a theory of structural change that is consistent with the long-run data. We first document the reallocation of economic activity across the three broad sectors agriculture, manufacturing, and services in the United States, the United Kingdom, Canada and Australia. We find three robust features of the sectoral consumption expenditure shares since the beginning of the last century: (i) a monotonic decrease in agriculture, (ii) a hump shape in manufacturing, and (iii) a late rise of services.

Given historical data on sectoral prices and nominal per-capita expenditure from 1900 to 2014, we then ask what demand side theory can quantitatively explain the observed structural change. Our analysis shows that preference specifications commonly used in the structural change literature struggle to do so. We also find that the Quadratic Almost Ideal Demand System (QAIDS)-which is frequently used in the microeconomic demand estimation literature-can  fit the data well. However, it is inconsistent with sustained growth of real per capita expenditure as observed in the data.

We propose a generalization of the Price Independent Generalized Linearity (PIGL) class of preferences which is flexible enough to allow for a non-monotonic relationship between sectoral expenditure shares and can nevertheless consistently be used in a dynamic general equilibrium model with steady growth.

Link to paper

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