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Does the Solow Residual Actually Measure Changes in Technology?

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  • James Hartley

Abstract

Real business cycle models purport to explain the business cycle as the result of technological change. This paper shows that the commonly used measure of technological change, the Solow residual, does not capture changes in the technology of the production function. The model used in this paper is within the framework of models described in Hansen & Sargent (1990, 1991). Technological change is modeled as a change in the value of one of the 'deep' technology parameters in the production function. The Solow residual is incapable of capturing the effects of this sort of technological change. There is no consistent relationship between the direction and size of a technological change and the sign and size of the Solow residual. The Solow residual often moves in the wrong direction, e.g. a negative technological shock causes a positive residual. Even when the Solow residual has the right sign, its size is not consistent with the size of the technological shock, e.g. a larger positive change in technology does not necessarily cause a larger positive Solow residual.

Suggested Citation

  • James Hartley, 2000. "Does the Solow Residual Actually Measure Changes in Technology?," Review of Political Economy, Taylor & Francis Journals, vol. 12(1), pages 27-44.
    • Handle: RePEc:taf:revpoe:v:12:y:2000:i:1:p:27-44
    DOI: 10.1080/095382500106803
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    3. Danilo Đokić & Bojan Matkovski & Marija Jeremić & Ivan Đurić, 2022. "Land Productivity and Agri-Environmental Indicators: A Case Study of Western Balkans," Land, MDPI, vol. 11(12), pages 1-13, December.
    4. Jesus Felipe & John S.L. McCombie, 2013. "The Aggregate Production Function and the Measurement of Technical Change," Books, Edward Elgar Publishing, number 1975, August.
    5. Rodríguez, Xosé A. & Loureiro, Maria L. & Arias, Carlos, 2021. "Measuring productivity in the extractive industries. Evidence from Spanish fluorite mining," Resources Policy, Elsevier, vol. 73(C).
    6. Đokić, Danilo & Matkovski, Bojan & Jeremić, Marija & Đurić, Ivan, 2022. "Land productivity and agri-environmental indicators: A case study of Western Balkans," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 11(12), pages 1-13.

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