How much do distortions affect growth?

William Easterly

    Research output: Contribution to journalArticlepeer-review


    This paper presents a simple endogenous growth model with two types of capital which can display sizeable long-run growth effects of distortionary policies. The model applies to many different types of distortions of relative prices common in developing countries, such as differential taxes and tariffs, black market exchange rates, and price controls. The model shows that a subsidy to one type of capital financed by a tax on another capital good lowers growth. A measure of the variance of relative prices of investment goods across sectors has a negative and statistically significant effect on growth.

    Original languageEnglish (US)
    Pages (from-to)187-212
    Number of pages26
    JournalJournal of Monetary Economics
    Issue number2
    StatePublished - Nov 1993

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics


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