Economic Growth and Human Capital: Methodology to Simulate a Lucas Model variant with application for Mexico

Abstract

The main objective of this paper is to set a variant of the Lucas (1988) model that may be easily calibrated and simulated. A second goal is to calibrate and simulate the proposed model for México. To achieve the previous objectives, we draw from the original Lucas (1988) model and the saving-investment structure proposed by Solow (1956, 1957). A calibration-simulation exercise for México shows that in order to increase the growth of the product per capita by less than one percentage, it is necessary to generate an additional savings, which is difficult to generate in the coming years. For this reason, growth in this country quite possibly will continue being low in the following years. The proposed methodology may generate a bias where growth depends in excess of the trajectory of human capital, which happens in Lucas type models (Lucas 1988, 2009). However, the reduced forms of the proposed model may be calibrated and simulated with relative ease for the majority of the countries that have information in public databases, like the Penn World Table.