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Tracking the new economy: using growth theory to detect changes in trend productivity

  • James A. Kahn
  • Robert W. Rich

The acceleration of productivity since 1995 has prompted a debate over whether the economy's underlying growth rate will remain high. In this paper, we draw on growth theory to identify variables other than productivity - namely consumption and labor compensation - to help estimate trend productivity growth. We treat that trend as a common factor with two "regimes" high-growth and low-growth. Our analysis picks up striking evidence of a switch in the mid-1990s to a higher long-term growth regime, as well as a switch in the early 1970s in the other direction. In addition, we find that productivity data alone provide insufficient evidence of regime changes; corroborating evidence from other data is crucial in identifying changes in trend growth. We also argue that our methodology would be effective in detecting changes in trend in real time: In the case of the 1990s, the methodology would have detected the regime switch within one quarter of its actual occurrence according to subsequent data.

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Article provided by Federal Reserve Bank of San Francisco in its journal Proceedings.

Volume (Year): (2003)
Issue (Month): Nov ()

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Handle: RePEc:fip:fedfpr:y:2003:i:nov:x:1
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