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Does the Solow Residual Actually Measure Changes in Technology?

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  • James Hartley
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    Abstract

    Real business cycle models purport to explain the business cycle as the result of technological change. This paper shows that the commonly used measure of technological change, the Solow residual, does not capture changes in the technology of the production function. The model used in this paper is within the framework of models described in Hansen & Sargent (1990, 1991). Technological change is modeled as a change in the value of one of the 'deep' technology parameters in the production function. The Solow residual is incapable of capturing the effects of this sort of technological change. There is no consistent relationship between the direction and size of a technological change and the sign and size of the Solow residual. The Solow residual often moves in the wrong direction, e.g. a negative technological shock causes a positive residual. Even when the Solow residual has the right sign, its size is not consistent with the size of the technological shock, e.g. a larger positive change in technology does not necessarily cause a larger positive Solow residual.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/095382500106803
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Review of Political Economy.

    Volume (Year): 12 (2000)
    Issue (Month): 1 ()
    Pages: 27-44

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    Handle: RePEc:taf:revpoe:v:12:y:2000:i:1:p:27-44

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    1. Lars Peter Hansen & Thomas J. Sargent, 1993. "Recursive linear models of dynamic economies," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    2. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
    3. Hartley, James & Sheffrin, Steven & Salyer, Kevin, 1997. "Calibration and Real Business Cycle Models: An Unorthodox Experiment," Journal of Macroeconomics, Elsevier, vol. 19(1), pages 1-17, January.
    4. Fisher, Franklin M, 1971. "Aggregate Production Functions and the Explanation of Wages: A Simulation Experiment," The Review of Economics and Statistics, MIT Press, vol. 53(4), pages 305-25, November.
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    Cited by:
    1. Rodriguez, Xose Anton & Arias, Carlos, 2008. "The effects of resource depletion on coal mining productivity," Energy Economics, Elsevier, vol. 30(2), pages 397-408, March.

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