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Aggregate productivity and aggregate technology

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  • Susanto Basu
  • John G. Fernald

Abstract

Aggregate productivity and aggregate technology are meaningful but distinct concepts. We show that a slightly-modified Solow productivity residual measures changes in economic welfare, even when productivity and technology differ because of distortions such as imperfect competition. We then present a general accounting framework that identifies several new non-technological gaps between productivity and technology, gaps reflecting imperfections and frictions in output and factor markets. Empirically, we find that these gaps are important, even though we abstract from variations in factor utilization and estimate only small average sectoral markups. Compared with productivity growth, our measured technology shocks are significantly less correlated with output, and are essentially uncorrelated with inputs. Our results imply that calibrating dynamic general equilibrium models as if Solow residuals were technology shocks confuses impulses and propagation mechanisms.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 593.

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Date of creation: 1997
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Handle: RePEc:fip:fedgif:593

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Keywords: Productivity ; Technology;

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References

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  1. Simon Gilchrist & John C. Williams, 2000. "Putty-Clay and Investment: A Business Cycle Analysis," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 928-960, October.
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  12. Basu, S., 1993. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," Papers 93-23, Michigan - Center for Research on Economic & Social Theory.
  13. M. L. Weitzman, 1974. "On the Welfare Significance of National Product in Dynamic Economy," Working papers 125, Massachusetts Institute of Technology (MIT), Department of Economics.
  14. William D. Nordhaus, 2001. "Alternative Methods for Measuring Productivity Growth," NBER Working Papers 8095, National Bureau of Economic Research, Inc.
  15. Julio J. Rotemberg & Michael Woodford, 1989. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," NBER Working Papers 3206, National Bureau of Economic Research, Inc.
  16. Bruno, Michael, 1984. "Raw Materials, Profits, and the Productivity Slowdown," The Quarterly Journal of Economics, MIT Press, vol. 99(1), pages 1-29, February.
  17. Susanto Basu, 1995. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," NBER Working Papers 5336, National Bureau of Economic Research, Inc.
  18. Bai, Chong-en & Li, David D. & Wang, Yijiang, 1997. "Enterprise Productivity and Efficiency: When Is Up Really Down?," Journal of Comparative Economics, Elsevier, vol. 24(3), pages 265-280, June.
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  23. Ramey, Valerie A. & Shapiro, Matthew D., 1998. "Costly capital reallocation and the effects of government spending," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 145-194, June.
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  26. repec:fth:stanho:e-95-3 is not listed on IDEAS
  27. Phelan, Christopher & Trejos, Alberto, 2000. "The aggregate effects of sectoral reallocations," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 249-268, April.
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