Do aggregate dynamics in developing economies differ after a rise in home and foreign productivity?

While developing economies set narrowing their productivity gap with advanced economies as a key goal, the macroeconomic consequences of productivity improvements in developing economies remain underexplored. In particular, the existing literature often overlooks whether domestic versus foreign-driven productivity gains have different aggregate effects. Our approach assumes that foreign technology spills over into developing economies’ technology, but not vice versa, allowing us to identify the distinct impacts of both sources of productivity growth in a novel way. Our findings show that U.S. productivity shocks in developing economies have minimal effects on such key macroeconomic variables as output, employment, prices, and so on, while domestic productivity shocks lead to significant and broad-based responses across all these variables. These contrasting effects challenge the complementary relationship found in larger developing economies like India and stress the need to differentiate between domestic and foreign sources of productivity improvements to better understand their economic impact.