Economics Webinar - Dynamic Big Push

We build a tractable macro-development growth model that incorporates hierarchical demand in preference and learning-by-doing in production, showing the interaction between the demand-side and supply-side forces in the dynamic process of development. Our model captures the growth pattern of "income-push new market" and "demand-pull innovation" and demonstrates that the production externality induced by market demand varies over time at different stages of development. Government policy plays a role in addressing the inefficiency of the laissez-faire equilibrium due to the presence of the dynamic externality. The optimal policy intervention is two-sided: suppressing consumption and enhancing capital accumulation in the early stage of development, while reversing the sign to stimulate consumption in the later stage.