lucas ( 1988 ) memorably wrote : the consequences for human welfare involved in questions like these are simply staggering : once one starts to think about them, it is hard to think about anything else. i. what drives growth in the long run? so let ’ s start to think : what does drive growth in the long run? in fact, growth theory – much like central banking – has come a long way. as everyone knows, solow ’ s work in the late ’ 50s produced two startling insights. 1 first, that smooth factor substitutability could rid us of the harrod - domar boom - bust cycle. this, in fact, paved the way for a proper analysis of solow ( 1956, 1957 ). bis central bankers ’ speeches sustainable growth. 2 his second insight was that growth was driven not only by factor accumulation but also by technological progress. fundamentally, technological progress and innovation are, over the long run, the prime drivers of economic growth and also important reasons for differences in international economic performance, even though demographic differences are also very relevant. higher growth rates of technical innovation raise output and can lower the non - inflationary rate of unemployment. but what is technical change? cracking open the solovian black box of technical progress has taken us from theories of learning - by - doing, to the impact of r & d on product variety and quality. the latter theories being underpinned by paul romer ’ s reflection on the fact that ideas are fundamentally non rival. 3 this concept, by the way, was not really new. the famous letter of thomas jefferson to isaac mcpherson expressed it very clearly in 1813. 4 the bottom line in all of this is that knowledge spillover between open, dynamic economies could benefit everyone. not surprisingly, these new developments in growth theory came replete with policy prescriptions. a more recent but allied literature suggested the following : how close an economy is to the technological frontier and whether its institutions facilitate convergence to that frontier are vital considerations. 5 in effect, a laggard country gains by implementing ( or jumping to ) frontier technologies. 6 ] but an economy near the frontier – or with an appetite to define that frontier – should increasingly favour innovation over imitation. like many close to european policy7, i find this an attractive framework. indeed, following world war ii, the european economies were remarkably catching up in productivity and technological terms and today are leaders in many fields, in particular as concerns the embedding of

in euro area countries had remained broadly stable since the late 1990s, at a level similar to the 14 us metropolitan statistical areas. 14 during the crisis we saw a temporary increase in inflation dispersion in the euro area but this has been reversed over the past 12 months. ( chart 1. ) the picture is similar for the dispersion of gdp growth. before the crisis the dispersion of growth rates was around 2 %, in both the euro area and the united states. dispersion rose somewhat during the crisis in both currency areas but remained broadly in line with pre - crisis patterns overall. 15 ( chart 2. ) going one step further, investigation of the sources of this growth dispersion in the us and euro area economies reveals parallels even in the root causes of dispersion in economic performance and productivity. on the one hand, both currency areas comprise regions that experienced a significant boom and bust cycle over the past decade. on the other hand, both also contain regions that are facing significant structural challenges of a more long - term nature. in the united states, for example, nevada, arizona, florida and california experienced increases in house prices that outpaced the national average by a wide margin. the steep house price increases accompanied above average growth in these states. this could probably be explained, at least in part, by the impulse that these states received from the housing - related sectors such as construction, which saw its share in terms of value added increase at the national level during the years of the housing boom. in the crisis, the sharp keynote address by jean - claude trichet, president of the ecb at the “ ecb and its watchers xiii ” conference, frankfurt am main, 10 june 2011. the use of all us states in the computation of gdp dispersion, in contrast to only 14 us metropolitan statistical areas ( msas ) in the computation of inflation dispersion, is to be explained by data availability. the most recent entries to the euro area have been excluded to avoid breaks in the time series. the 2010 data for us regions are estimates published by the bureau of economic analysis on 7 june 2011. bis central bankers ’ speeches fall in house prices in florida and the south - western us states turned boom into bust. these states experienced the harshest recession among the us states. 16 similarly, in the euro area some countries experienced asymmetric boom - and - bust cycles. several euro area countries had higher than average growth in the pre -