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Transitory Productivity Shocks and Long-Run Output

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  • Galor, Oded
  • Tsiddon, Daniel

Abstract

This paper analyzes the effects of transitory productivity shocks on long-run output. The study demonstrates that, despite it transitory nature, an adverse productivity shock may result in lower long-run output. A fall in productivity reduces output and savings and, consequently, the interest rate increases and investment in human capital falls. Although productivity returns to its initial level, a sufficiently large reduction in investment pushes the economy to a new stationary equilibrium with lower output. A redistribution of income from consumers to savers may restore the initial long-run output. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Galor, Oded & Tsiddon, Daniel, 1992. "Transitory Productivity Shocks and Long-Run Output," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(4), pages 921-933, November.
  • Handle: RePEc:ier:iecrev:v:33:y:1992:i:4:p:921-33
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    Cited by:

    1. Michael Bruno, 1993. "Inflation and Growth in an Integrated Approach," NBER Working Papers 4422, National Bureau of Economic Research, Inc.
    2. Sakuragawa, Masaya & Hamada, Koichi, 2001. "Capital Flight, North-South Lending and Stages of Economic Development," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 1-24, February.
    3. Gomulka, S. & Lane, J., 1997. "Recession dynamics following an external price shock in a transition economy," Structural Change and Economic Dynamics, Elsevier, vol. 8(2), pages 177-203, June.

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