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Aggregate productivity and aggregate technology

Listed author(s):
  • Susanto Basu
  • John G. Fernald

Aggregate productivity and aggregate technology are meaningful but distinct concepts. We show that a slightly-modified Solow productivity residual measures changes in economic welfare, even when productivity and technology differ because of distortions such as imperfect competition. We then present a general accounting framework that identifies several new non-technological gaps between productivity and technology, gaps reflecting imperfections and frictions in output and factor markets. Empirically, we find that these gaps are important, even though we abstract from variations in factor utilization and estimate only small average sectoral markups. Compared with productivity growth, our measured technology shocks are significantly less correlated with output, and are essentially uncorrelated with inputs. Our results imply that calibrating dynamic general equilibrium models as if Solow residuals were technology shocks confuses impulses and propagation mechanisms.

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File URL: http://www.federalreserve.gov/pubs/ifdp/1997/593/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/1997/593/ifdp593.pdf
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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 593.

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Date of creation: 1997
Handle: RePEc:fip:fedgif:593
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  1. Galí, Jordi, 1996. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," CEPR Discussion Papers 1499, C.E.P.R. Discussion Papers.
  2. Cogley, Timothy & Nason, James M, 1995. "Output Dynamics in Real-Business-Cycle Models," American Economic Review, American Economic Association, vol. 85(3), pages 492-511, June.
  3. Basu, S. & Fernald, J.G., 1993. "Are Apparent Productive Spillovers a Figment of Specification Error," Papers 93-22, Michigan - Center for Research on Economic & Social Theory.
  4. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-278, June.
  5. Robert J. Barro & Robert G. King, 1984. "Time-Separable Preferences and Intertemporal-Substitution Models of Business Cycles," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 817-839.
  6. Miles S. Kimball, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," NBER Working Papers 5046, National Bureau of Economic Research, Inc.
  7. Susanto Basu, 1994. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," NBER Working Papers 4817, National Bureau of Economic Research, Inc.
  8. William D. Nordhaus, 2001. "Alternative Methods for Measuring Productivity Growth," NBER Working Papers 8095, National Bureau of Economic Research, Inc.
  9. Kenneth L. Judd, 1997. "The Optimal Tax Rate for Capital Income is Negative," NBER Working Papers 6004, National Bureau of Economic Research, Inc.
  10. Julio J. Rotemberg & Michael Woodford, 1989. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," NBER Working Papers 3206, National Bureau of Economic Research, Inc.
  11. Susanto Basu, 1995. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," NBER Working Papers 5336, National Bureau of Economic Research, Inc.
  12. Michael Bruno, 1984. "Raw Materials, Profits, and the Productivity Slowdown," The Quarterly Journal of Economics, Oxford University Press, vol. 99(1), pages 1-29.
  13. Robert E. Hall, 1986. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
  14. Eric T. Swanson, 2006. "The relative price and relative productivity channels for aggregate fluctuations," Working Paper Series 2006-20, Federal Reserve Bank of San Francisco.
  15. Berndt, Ernst R. & Fuss, Melvyn A., 1986. "Productivity measurement with adjustments for variations in capacity utilization and other forms of temporary equilibrium," Journal of Econometrics, Elsevier, vol. 33(1-2), pages 7-29.
  16. Caballero, Ricardo J. & Lyons, Richard K., 1992. "External effects in U.S. procyclical productivity," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 209-225, April.
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  18. M. L. Weitzman, 1974. "On the Welfare Significance of National Product in Dynamic Economy," Working papers 125, Massachusetts Institute of Technology (MIT), Department of Economics.
  19. Horvath, Michael, 2000. "Sectoral shocks and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 69-106, February.
  20. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1995. "Capital Utilization and Returns to Scale," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 67-124 National Bureau of Economic Research, Inc.
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  23. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
  24. Julio J. Rotemberg & Michael Woodford, 1996. "Imperfect Competition and the Effects of Energy Price Increases on Economic Activity," NBER Working Papers 5634, National Bureau of Economic Research, Inc.
  25. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
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  27. Ramey, Valerie A. & Shapiro, Matthew D., 1998. "Costly capital reallocation and the effects of government spending," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 145-194, June.
  28. repec:hoo:wpaper:e-95-3 is not listed on IDEAS
  29. Bai, Chong-en & Li, David D. & Wang, Yijiang, 1997. "Enterprise Productivity and Efficiency: When Is Up Really Down?," Journal of Comparative Economics, Elsevier, vol. 24(3), pages 265-280, June.
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