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Investment as a transmission mechanism from weak demand to weak supply and the post-crisis productivity slowdown

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  • Patrice Ollivaud
  • Yvan Guillemette
  • David Turner

Abstract

Current weak labour productivity growth in many OECD countries reflects historically weak contributions from both total factor productivity (TFP) growth and capital deepening. The slowdown in trend productivity growth in the pre-crisis period is mostly explained by a long-established slowdown in TFP growth, but since the crisis the further deceleration is mainly due to weak capital deepening, a development apparent in practically every OECD country. Much of the weakness in the growth of the capital stock since the financial crisis can be explained by an accelerator response of investment to continued demand weakness, leading in turn to a deterioration of potential output via a hysteresis-like effect. For the most severely affected economies, the financial crisis is estimated to have reduced potential output by more than 2% via this transmission mechanism. In many OECD countries, declining government investment as a share of GDP has further exacerbated post-crisis weakness in capital stock growth, both directly and probably indirectly via adverse spillover effects on business investment. Finally, over a period when the use of conventional macro policy instruments was constrained, the slower pace of structural reform represents a missed opportunity, not least because more competition-friendly product market regulation could have boosted both investment and potential growth.

Suggested Citation

  • Patrice Ollivaud & Yvan Guillemette & David Turner, 2018. "Investment as a transmission mechanism from weak demand to weak supply and the post-crisis productivity slowdown," OECD Economics Department Working Papers 1466, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:1466-en
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    File URL: https://doi.org/10.1787/0c62cc26-en
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    References listed on IDEAS

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    1. Gita Gopinath & Şebnem Kalemli-Özcan & Loukas Karabarbounis & Carolina Villegas-Sanchez, 2017. "Capital Allocation and Productivity in South Europe," The Quarterly Journal of Economics, Oxford University Press, vol. 132(4), pages 1915-1967.
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    4. Patrice Ollivaud & David Turner, 2015. "The effect of the global financial crisis on OECD potential output," OECD Journal: Economic Studies, OECD Publishing, vol. 2014(1), pages 41-60.
    5. Sara Calligaris, 2015. "Misallocation and Total Factor Productivity in Italy: Evidence from Firm-Level Data," LABOUR, CEIS, vol. 29(4), pages 367-393, December.
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    11. repec:eee:macchp:v2-2131 is not listed on IDEAS
    12. David Turner & Maria Chiara Cavalleri & Yvan Guillemette & Alexandre Kopoin & Patrice Ollivaud & Elena Rusticelli, 2016. "An investigation into improving the real-time reliability of OECD output gap estimates," OECD Economics Department Working Papers 1294, OECD Publishing.
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    More about this item

    Keywords

    accelerator effect; capacity; capital stock; financial crisis; global financial crisis; hysteresis; investment; potential output;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions

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