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Are Cyclical Fluctuations in Productivity Due More to Supply Shocks or Demand Shocks?

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Abstract

Measured productivity is strongly procyclical. Real business cycle theories suggest that actual fluctuations in productivity are the source of fluctuations in aggregate output. Keynesian theories maintain that fluctuations in aggregate output come from shocks to aggregate demand. Keynesian theories appeal to labor hoarding or off the production function behavior to explain the procyclicality of productivity. If observed productivity shocks are true productivity shocks, a function of factor prices should covary exactly with productivity. In annual data for United States industries, that function of factor prices and conventionally-measured productivity move together very closely. Moreover, their difference is uncorrelated with aggregate output.

Suggested Citation

  • Matthew D. Shapiro, 1987. "Are Cyclical Fluctuations in Productivity Due More to Supply Shocks or Demand Shocks?," Cowles Foundation Discussion Papers 822, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:822
    Note: CFP 677.
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