This paper presents a model that introduces in an unbalanced growth framework à la Baumol the hypothesis of an endogenous productivity growth due to a positive externality of the service sector on manufacturing productivity and a learning-by-doing process inside both sectors. The model shows that a policy aimed at keeping the ratio between outputs in the two sectors constant in real terms may improve the aggregate productivity performance of the economy, depending on the parameters' values. Then the model derives the dynamics of the intersectoral transfer which is necessary to keep the ratio between outputs constant, and verifies that the amount of the transfer turns out to be always lower than the output of the manufacturing sector, and only asymptotically approaches it.
The paper presents a dynamic model incorporating a range of non-accelerating-in¯ation rates of unemployment (NAIRU) obtained according to the theoretical framework proposed by the customer markets literature. The analysis of the dynamic adjustments of unemployment and in¯ation emphasizes the real effects of demand shocks. Changes in the ®scal and monetary policy can exert permanent effects on output and unemployment, both determining persistence in the unemployment rate and selecting the actual steady-state equilibrium within the NAIRU range.
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