Economic growth, population and pollution interdependence under stochastic shocks: Does convergence speed matter?∗

We study dynamics of interactions among environmental pollution, population and output growth showing that shocks are persistent in these systems and that they converge slowly to the steady state. It is demonstrated that the extent of persistence in economic growth is determined by the convergence speed of shocks in both environmental pollution and population. A modified Solow-Swan economy is simulated to illustrate that non-mean convergent shocks in these series alter growth trajectories of output in the long run. An empirical analysis is carried out to examine persistence and co-movement pattern of pollution, population and per capita income time series for a sample of highly-polluted OECD and non-OECD countries over the period 1950-2003. The magnitude of shocks found are high enough to oscillate long-run economic growth. Moreover, the population, output and population growth are found to be (fractionally) co-integrated where the co-evolutionary pattern is characterized by slow-adjustment to long-run equilibrium. The implication is that a joint shock control policy in population and environmental pollution would provide stability to long-run economic growth, although the effectiveness of such policy would depend on the magnitude of shocks in environmental and demographic systems. JEL Classification codes: O13, O47, C14, C22, J11