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Are Cyclical Fluctuations in Productivity Due More to Supply Shocks or Demand Shocks?

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Abstract

Measured productivity is strongly procyclical. Real business cycle theories suggest that actual fluctuations in productivity are the source of fluctuations in aggregate output. Keynesian theories maintain that fluctuations in aggregate output come from shocks to aggregate demand. Keynesian theories appeal to labor hoarding or off the production function behavior to explain the procyclicality of productivity. If observed productivity shocks are true productivity shocks, a function of factor prices should covary exactly with productivity. In annual data for United States industries, that function of factor prices and conventionally-measured productivity move together very closely. Moreover, their difference is uncorrelated with aggregate output.

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File URL: http://cowles.econ.yale.edu/P/cd/d08a/d0822.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 822.

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Length: 19 pages
Date of creation: Feb 1987
Date of revision:
Publication status: Published in AEA Papers and Proceedings (May 1987), 77(2): 118-124
Handle: RePEc:cwl:cwldpp:822

Note: CFP 677.
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Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Keywords: Business cycles; macroeconomic fluctuations; productivity; aggregate demand; factor prices;

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References

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  1. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  2. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-47, October.
  3. Matthew D. Shapiro, 1986. "Investment, Output, and the Cost of Capital," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1), pages 111-164.
  4. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Staff Report 102, Federal Reserve Bank of Minneapolis.
  5. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
  6. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  7. Hendrik S. Houthhakker, 1979. "Growth and Inflation: Analysis by Industry," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(1), pages 241-257.
  8. Lawrence H. Summers, 1986. "Some skeptical observations on real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 23-27.
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Cited by:
  1. Michael Woodford, 1990. "Self-Fulfilling Expectations and Fluctuations in Aggregate Demand," NBER Working Papers 3361, National Bureau of Economic Research, Inc.
  2. Klette, T.J., 1992. "The Inconsistency of Common Scale Estimators when Output Prices are unobserved and Endogenous," Harvard Institute of Economic Research Working Papers 1586, Harvard - Institute of Economic Research.
  3. Michael A. Kouparitsas, 1996. "North-South business cycles," Working Paper Series, Macroeconomic Issues WP-96-9, Federal Reserve Bank of Chicago.
  4. Altug, Sumru G. & Filiztekin, Alpay, 1999. "Estimates of the Returns to Scale for US Manufacturing," CEPR Discussion Papers 2121, C.E.P.R. Discussion Papers.
  5. Matthew D. Shapiro, 1987. "Measuring Market Power in U.S. Industry," Cowles Foundation Discussion Papers 828, Cowles Foundation for Research in Economics, Yale University.
  6. J. Bradford De Long, 1990. "Interpreting Procyclical Productivity Movements: Evidence from a Cross-Nation Cross-Industry Panel," J. Bradford De Long's Working Papers _136, University of California at Berkeley, Economics Department.
  7. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1989. "Increasing Returns, Durables and Economic Fluctuations," NBER Working Papers 3014, National Bureau of Economic Research, Inc.
  8. Chang-Tai Hsieh, 1999. "Productivity Growth and Factor Prices in East Asia," American Economic Review, American Economic Association, vol. 89(2), pages 133-138, May.
  9. Michael A. Kouparitsas, 1996. "North-South financial integration and business cycles," Working Paper Series, Macroeconomic Issues WP-96-10, Federal Reserve Bank of Chicago.
  10. Michael J. Hicks, 2007. "Hierarchical delays as a source of nominal price rigidities: evidence from the microcomputer industry," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 803-815.
  11. Paquet, Alain & Robidoux, Benoit, 2001. "Issues on the measurement of the Solow residual and the testing of its exogeneity: Evidence for Canada," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 595-612, June.
  12. Bennett T. McCallum, 1990. "Real Business Cycle Models," NBER Working Papers 2480, National Bureau of Economic Research, Inc.
  13. Francisco J. Goerlich-Gisbert, 1999. "Shocks agregados versus shocks sectoriales. Un análisis factorial dinámico," Investigaciones Economicas, Fundación SEPI, vol. 23(1), pages 27-53, January.
  14. Jacques Miniane, 2004. "Productivity Shocks, Learning, and Open Economy Dynamics," IMF Working Papers 04/88, International Monetary Fund.
  15. Falk, Martin & Raiser, Martin & Brauer, Holger, 1996. "Making sense of the J-curve: Capital utilisation, output, and total factor productivity in Polish industry 1990 - 1993," Kiel Working Papers 723, Kiel Institute for the World Economy.
  16. Francisco J. Goerlich, 1994. "Comportamiento cíclico de la productividad en la industria: shocks de oferta versus shocks de demanda," Investigaciones Economicas, Fundación SEPI, vol. 18(3), pages 491-515, September.

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