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Rich nations, poor nations:
how much can multiple equilibria explain?

Bryan S. Graham and Jonathan R. W. Temple

ABSTRACT: This paper asks whether the income gap between rich and poor nations can be explained by multiple equilibria. We explore the quantitative implications of a simple two sector general equilibrium model that gives rise to multiplicity, and calibrate the model for a large number of countries. Under the assumptions of the model, around a quarter of the world's economies are found to be in a low output equilibrium. The output gains associated with an equilibrium switch are sizeable, but well short of the vast income disparity observed in the data.

Keywords: poverty traps, multiple equilibria, TFP differences,calibration

Last updated 28 August 2014 by IIIS (Email).