IMPLICATIONS OF SOLOW GROWTH-MODEL IN THE PRESENCE OF A STOCHASTIC STEADY-STATE

The paper analyzes Solow's model, showing that the rates of capital ac cumulation and population growth are stochastic variables with unit ro ots, rather than constant parameters. As a consequence, the equilibriu m level of labor productivity in efficiency units can contain a unit r oot, and Solow's model has to be interpreted as an error correction mo del, consistent with the variables' stochastic nature. Implications on time series cointegration are tested, using annual data from four cou ntries. The error correction mechanism, i.e., the convergence of curre nt productivity towards its stochastic steady-state path, never appear s to have been operative in any considered case.