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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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    1. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 11-44, January.
    2. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
    3. Hendrik S. Houthhakker, 1979. "Growth and Inflation: Analysis by Industry," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(1), pages 241-257.
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    5. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-947, October.
    6. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
    7. Lawrence H. Summers, 1986. "Some skeptical observations on real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 23-27.
    8. Matthew D. Shapiro, 1986. "Investment, Output, and the Cost of Capital," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1), pages 111-164.
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    Cited by:

    1. Michael A. Kouparitsas, 1996. "North-South financial integration and business cycles," Working Paper Series, Macroeconomic Issues WP-96-10, Federal Reserve Bank of Chicago.
    2. Bennett T. McCallum, 1988. "Real Business Cycle Models," NBER Working Papers 2480, National Bureau of Economic Research, Inc.
    3. Matthew D. Shapiro, 1987. "Measuring Market Power in U.S. Industry," NBER Working Papers 2212, National Bureau of Economic Research, Inc.
    4. Jacques A Miniane, 2004. "Productivity Shocks, Learning, and Open Economy Dynamics," IMF Working Papers 04/88, International Monetary Fund.
    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. Klette, Tor Jakob & Griliches, Zvi, 1996. "The Inconsistency of Common Scale Estimators When Output Prices Are Unobserved and Endogenous," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(4), pages 343-361, July-Aug..
    7. Francisco J. Goerlich, 1994. "Comportamiento cíclico de la productividad en la industria: shocks de oferta versus shocks de demanda," Investigaciones Economicas, Fundación SEPI, vol. 18(3), pages 491-515, September.
    8. Altug, S. & Filiztekin, A., 1997. "Estimates of the Returns to Scale for US Manufacturing," Papers 1997/24, Koc University.
    9. J. Bradford De Long, 1990. "Interpreting Procyclical Productivity Movements: Evidence from a Cross-Nation Cross-Industry Panel," J. Bradford De Long's Working Papers _136, University of California at Berkeley, Economics Department.
    10. repec:kap:jproda:v:48:y:2017:i:2:d:10.1007_s11123-017-0516-4 is not listed on IDEAS
    11. Michael J. Hicks, 2007. "Hierarchical delays as a source of nominal price rigidities: evidence from the microcomputer industry," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 803-815.
    12. Michael Woodford, 1990. "Self-Fulfilling Expectations and Fluctuations in Aggregate Demand," NBER Working Papers 3361, National Bureau of Economic Research, Inc.
    13. Chang-Tai Hsieh, 1999. "Productivity Growth and Factor Prices in East Asia," American Economic Review, American Economic Association, vol. 89(2), pages 133-138, May.
    14. Francisco J. Goerlich-Gisbert, 1999. "Shocks agregados versus shocks sectoriales. Un análisis factorial dinámico," Investigaciones Economicas, Fundación SEPI, vol. 23(1), pages 27-53, January.
    15. Michael A. Kouparitsas, 1996. "North-South business cycles," Working Paper Series, Macroeconomic Issues WP-96-9, Federal Reserve Bank of Chicago.
    16. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1989. "Increasing Returns, Durables and Economic Fluctuations," NBER Working Papers 3014, National Bureau of Economic Research, Inc.

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