We consider a neoclassical interpretation of Germany and Japan’s rapid postwar growth that relies on a catch-up mechanism through capital accumulation where technology is embodied in new capital goods. Using a putty-clay model of production and investment, we are able to capture many of the key empirical properties of Germany and Japan’s postwar transitions, including persistently high but declining rates of labor and total factor productivity growth, a U-shaped response of the capital-output ratio, rising rates of investment and employment, and moderate rates of return to capital.
Williams, John C., and Simon Gilchrist. 2004. “Transition Dynamics in Vintage Capital Models: Explaining the Postwar Catch-Up of Germany and Japan,” Federal Reserve Bank of San Francisco Working Paper 2004-14. Available at https://doi.org/10.24148/wp2004-14