OBSERVATIONAL EQUIVALENCE AND A STOCHASTIC COINTEGRATION TEST OF THE NEOCLASSICAL AND ROMERS INCREASING RETURNS MODELS

In this paper, we suggest a time series test based on the idea of stoc hastic cointegration to compare endogenous growth models with those ba sed on exogenous technological progress, and apply it to the neoclassi cal and Romer's models. First, the non-stationarity and cointegration implications under these two models are derived. They provide the basi s for an examination of the phenomenon of observational equivalence an d for empirical analysis. We then apply the test to the data of Japan, UK and USA. Empirical results suggest that in each country, there is (are) missing unit root process(es) in the production technology and f urther investigation is needed to understand the mechanics of economic growth.