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Capital goods, measured TFP and growth: The case of Spain

Listed author(s):
  • Antonia Diaz
  • Luis Franjo

    (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland)

This paper reconciles two, apparently, contradictory facts about the Spanish economy: real GDP per working age person has grown at 2.4 percent during the period 1996-2007, on average, whereas Total Factor Productivity has been stagnant during that period. Here we argue that the Spanish economy has grown, in spite of stagnant TFP, because investment in structures has been heavily subsidized. This inefficiently high rate of investment in structures is the main reason for the increase in hours worked observed during that period. We use a three sector model economy where we distinguish between equipment and structures to quantify the sources of changes in measured TFP in Spain. We find that measured TFP is low because Investment-Specific Technical Change in Spain is very low. A calibrated version of this model is able to reproduce very well the growth experience of Spain for the period 1970-2007. We use the model economy to quantify the cost of direct and indirect subsidies to structures and the gains of eliminating them in terms of TFP and income growth. Our three sector model economy also allows us to quantify the cost in measured TFP of the housing price boom experienced during the 2000s.

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Paper provided by Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne in its series Working Papers with number 201401.

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Length: 48 pages
Date of creation: Oct 2014
Date of revision: Oct 2014
Handle: RePEc:cif:wpaper:201401
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