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Issues on the Measurement of the Solow Residual and the Testing of its Exogeneity: a Tale of Two Countries

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Abstract

Using aggregate US and Canadian data, this paper examines the implications for the empirical assessment of market structure and exogeneity of productivity shocks of correcting the Solow residual for variation in capacity utilization. In contrast to most studies, not accounting for capacity utilization, our results suggest that the US and Canadian market structures are well described by constant returns to scale and perfect competition. They also suggest that Canadian productivity shocks are exogenous to real and monetary variables, while US productivity shocks become exogenous to narrowly-defined monetary aggregates and monetary policy innovations when the capital stock is adjusted for variations in utilization rates. À l'aide de données agrégées américaines et canadiennes, nous examinons les implications empiriques quant à la structure de marché et à l'exogénéité des chocs de productivité, suite à la correction de la mesure du résidu de Solow lorsqu'il y a utilisation variable du capital. Comparativement, à la plupart des études qui ont ignoré cette considération, nos résultats suggèrent qu'en agrégé, les structures de marché canadienne et américaine sont convenablement caractérisées par des rendements constants à l'échelle et la concurrence parfaite. Nous trouvons aussi qu'après ajustement pour un taux variable d'utilisation du stock de capital, la mesure corrigée des chocs de productivité canadiens est exogène aux variables monétaires et réelles, alors que celle des chocs de productivité américains devient exogène aux agrégats monétaires étroits et aux innovations monétaires.

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  • Alain Paquet & Benoit Robidoux, 1997. "Issues on the Measurement of the Solow Residual and the Testing of its Exogeneity: a Tale of Two Countries," Cahiers de recherche CREFE / CREFE Working Papers 51, CREFE, Université du Québec à Montréal.
  • Handle: RePEc:cre:crefwp:51
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    Cited by:

    1. Bournakis, Ioannis & Christopoulos, Dimitris & Mallick, Sushanta, 2015. "Knowledge Spillovers, Absorptive Capacity and Growth: An Industry-level Analysis for OECD Countries," MPRA Paper 63542, University Library of Munich, Germany.
    2. Kukić, Leonard, 2017. "Socialist growth revisited: insights from Yugoslavia," Economic History Working Papers 85079, London School of Economics and Political Science, Department of Economic History.
    3. Imbs, Jean M., 1999. "Technology, growth and the business cycle," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 65-80, August.
    4. Elizabeth Wakerly & Byron Scott & James Nason, 2006. "Common trends and common cycles in Canada: who knew so much has been going on?," Canadian Journal of Economics, Canadian Economics Association, vol. 39(1), pages 320-347, February.
    5. Paquet, Alain & Robidoux, Benoit, 2001. "Issues on the measurement of the Solow residual and the testing of its exogeneity: Evidence for Canada," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 595-612, June.
    6. Jeong-Joon Lee, 2006. "The Adjusted Solow Residual and Asset Returns (Subsequently published in "Eastern Economic Journal", 2007, 33,(2), pp. 231-255. )," CARF F-Series CARF-F-056, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    7. Sylvain Leduc & Keith Sill, 2007. "Monetary Policy, Oil Shocks, and TFP: Accounting for the Decline in U.S. Volatility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 595-614, October.
    8. Kukić, Leonard, 2017. "Regional development under socialism: evidence from Yugoslavia," Economic History Working Papers 85078, London School of Economics and Political Science, Department of Economic History.
    9. Paolo Buccirossi & Lorenzo Ciari & Tomaso Duso & Giancarlo Spagnolo & Cristiana Vitale, 2013. "Competition Policy and Productivity Growth: An Empirical Assessment," The Review of Economics and Statistics, MIT Press, vol. 95(4), pages 1324-1336, October.
    10. Bournakis, Ioannis & Christopoulos, Dimitris & Mallick, Sushanta, 2015. "Knowledge Spillovers and Output per Worker: An Industry-level Analysis for OECD Countries," MPRA Paper 84948, University Library of Munich, Germany, revised 05 Oct 2016.
    11. Paul E. Brockway & Matthew K. Heun & João Santos & John R. Barrett, 2017. "Energy-Extended CES Aggregate Production: Current Aspects of Their Specification and Econometric Estimation," Energies, MDPI, Open Access Journal, vol. 10(2), pages 1-23, February.
    12. Shutao Cao & Danny Leung, 2010. "Labour Reallocation, Relative Prices and Productivity," Staff Working Papers 10-2, Bank of Canada.
    13. Jeong-Joon Lee, 2007. "The Adjusted Solow Residual and Asset Returns," Eastern Economic Journal, Eastern Economic Association, vol. 33(2), pages 231-255, Spring.
    14. Danny Leung, 2004. "The Effect of Adjustment Costs and Organizational Change on Productivity in Canada: Evidence from Aggregate Data," International Productivity Monitor, Centre for the Study of Living Standards, vol. 9, pages 52-61, Fall.
    15. Danny Leung & Yi Zheng, 2012. "What affects MFP in the long-run? Evidence from Canadian industries," Applied Economics, Taylor & Francis Journals, vol. 44(6), pages 727-738, February.
    16. Sofiane Ghali & Pierre Mohnen, 2002. "TFP and Economic Potential of The Tunisian Economy," Working Papers 0225, Economic Research Forum, revised 05 Sep 2002.
    17. Bonga-Bonga, Lumengo & Phume, Maphelane, 2017. "Assessing the relationship between total factor productivity and foreign direct investment in an economy with a skills shortage: the case of South Africa," MPRA Paper 83288, University Library of Munich, Germany.
    18. Richard Dion & Robert Fay, 2008. "Understanding Productivity: A Review of Recent Technical Research," Discussion Papers 08-3, Bank of Canada.
    19. James MacGee & Weiqiu Yu, 2000. "The behaviour of productivity growth rates and composition bias in the labour input," Applied Economics Letters, Taylor & Francis Journals, vol. 7(9), pages 595-598.

    More about this item

    Keywords

    Solow residuals; exogeneity; productivity shocks; market structure; varying capacity utilization;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical

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