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Capital quality improvement and the sources of growth in the euro area

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  • Sakellaris, Plutarchos
  • Vijselaar, Focco
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    Abstract

    Capital quality improvement is a general phenomenon. Therefore quality correction is needed in price indexes. There is substantial evidence of biases in the official price indexes of capital equipment. We apply to euro area statistics estimates of these biases based on US data thus deriving quality-adjusted price indexes. Adjusted for quality, productive capital stocks of equipment and software grow on average 3 percentage points faster annually - a doubling of their growth rates. Quality-adjusted output grows 0.46 percentage points faster annually - a 20 percent increase. In terms of growth accounting, quality adjustment subtracts 11 percentage points from the share of TFP in aggregate growth and adds them to the share of equipment stock. For the 1990s only the difference is even higher: 14 percentage points. When all is told, embodied technological change accounts for 46 percent of (quality-adjusted) output growth in the euro area over the period 1982 to 2000. JEL Classification: O3, O47, D24, E22

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    Bibliographic Info

    Paper provided by European Central Bank in its series Working Paper Series with number 0368.

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    Date of creation: Jun 2004
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    Handle: RePEc:ecb:ecbwps:20040368

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    Keywords: embodied technological change; equipment investment; euro area; investment price deflators; output growth;

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    1. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1996. "Long-Run Implications of Investment-Specific Technological Change," RCER Working Papers 420, University of Rochester - Center for Economic Research (RCER).
    2. Gordon, Robert J., 1990. "The Measurement of Durable Goods Prices," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226304557, December.
    3. Francesco Daveri, . "Is Growth an Information Technology Story in Europe Too?," EPRU Working Paper Series 00-12, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    4. Andreas Hornstein & Per Krusell, 1996. "Can Technology Improvements Cause Productivity Slowdowns?," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 209-276 National Bureau of Economic Research, Inc.
    5. Bahk, Byong-Hong & Gort, Michael, 1993. "Decomposing Learning by Doing in New Plants," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 561-83, August.
    6. Robert J. Gordon, 1990. "The Measurement of Durable Goods Prices," NBER Books, National Bureau of Economic Research, Inc, number gord90-1.
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