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Does the Solow Residual Actually Measure Changes in Technology?


  • James Hartley


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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    References listed on IDEAS

    1. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    2. Fisher, Franklin M, 1971. "Aggregate Production Functions and the Explanation of Wages: A Simulation Experiment," The Review of Economics and Statistics, MIT Press, vol. 53(4), pages 305-325, November.
    3. Lars Peter Hansen & Thomas J. Sargent, 1993. "Recursive linear models of dynamic economies," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    4. Hartley, James & Sheffrin, Steven & Salyer, Kevin, 1997. "Calibration and Real Business Cycle Models: An Unorthodox Experiment," Journal of Macroeconomics, Elsevier, vol. 19(1), pages 1-17, January.
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    Cited by:

    1. Rodriguez, Xose Anton & Arias, Carlos, 2008. "The effects of resource depletion on coal mining productivity," Energy Economics, Elsevier, vol. 30(2), pages 397-408, March.
    2. Shahiduzzaman, Md. & Alam, Khorshed, 2014. "Information technology and its changing roles to economic growth and productivity in Australia," Telecommunications Policy, Elsevier, vol. 38(2), pages 125-135.
    3. Jesus Felipe & John S.L. McCombie, 2013. "The Aggregate Production Function and the Measurement of Technical Change," Books, Edward Elgar Publishing, number 1975.

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