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An unobserved components model of total factor productivity and the relative price of investment

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  • Joshua C.C. Chan
  • Edouard Wemy

Abstract

This paper applies the common stochastic trends representation approach to the time series of total factor productivity and the relative price of investment to investigate the relationship between neutral technology and investment-specific technology. The permanent and transitory movements in both series are estimated efficiently via MCMC methods using band matrix algorithms. The results indicate that total factor productivity and the relative price of investment are, each, well-represented by an integrated process of order one. In addition, their time series share a common trend component that we interpret as reflecting changes in General Purpose Technology. These results suggest that (1) the traditional view of assuming that neutral technology and investment-specific technology follow independent processes is not supported by the features of the time series and (2) advances in information and communication technologies are general purpose technological progress that drive the trend in aggregate TFP in the United States.

Suggested Citation

  • Joshua C.C. Chan & Edouard Wemy, 2020. "An unobserved components model of total factor productivity and the relative price of investment," CAMA Working Papers 2020-109, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2020-109
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2020-12/109_2020_chan_wemy.pdf
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    Keywords

    Business cycles; Investment-specific technological change; Total Factor Productivity; Unobserved Components Model;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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