Stochastic growth: Empirical evidence from the G7 countries

This paper provides a methodological contribution to the empirical literature on stochastic economic growth. The augmented Solow-Swan model with stochastic capital accumulation rates and labor force growth implies that the steady-state labor productivity level towards which an economy converges varies over time and across countries, and the adjustment process towards long-run equilibrium follows a nonlinear process. Using postwar data for the G7 countries, we provide strong empirical evidence supporting the existence of the long-run relationship implied by the augmented Solow-Swan model. Moreover, the hypothesis of linearity of the adjustment towards long-run equilibrium is rejected in favor of a logistic smooth transition autoregressive process.