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Solow Residuals without Capital Stocks

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  • Michael C. Burda
  • Battista Severgnini

Abstract

For more than fifty years, the Solow decomposition (Solow 1957) has served as the standard measurement of total factor productivity (TFP) growth in economics and management, yet little is known about its precision, especially when the capital stock is poorly measured. Using synthetic data generated from a prototypical stochastic growth model, we explore the quantitative extent of capital measurement error when the initial condition is unknown to the analyst and when capacity utilization and depreciation are endogenous. We propose two alternative measurements which eliminate capital stocks from the decomposition and significantly outperform the conventional Solow residual, reducing the root mean squared error in simulated data by as much as two-thirds. This improvement is inversely related to the sample size as well as proximity to the steady state. As an application, we compute and compare TFP growth estimates using data from the new and old German federal states.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2008-040.

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Length: 36 pages
Date of creation: Aug 2008
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Handle: RePEc:hum:wpaper:sfb649dp2008-040

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Keywords: Total factor productivity; Solow residual; generalized differences; measurement error; Malmquist index;

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Cited by:
  1. Michael C Burda & Battista Severgnini, 2009. "TFP Growth in Old and New Europe," Comparative Economic Studies, Palgrave Macmillan, vol. 51(4), pages 447-466, December.
  2. Growiec, Jakub, 2009. "On the Measurement of Technological Progress Across Countries," MPRA Paper 19321, University Library of Munich, Germany.

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