Productivity Growth and the Trade Balance in the 1990s: the Role of Evolving Perceptions
This paper examines the importance of productivity shocks in accounting for salient features of U.S. economic developments during the second half of the 1990s, including the surge in investment spending, the substantial deterioration of the trade balance, and the modest decline in inflation. We calibrate a two-country dynamic general equilibrium model and show that agents' perceptions regarding the permanence of the shocks that occurred in the late 1990s are crucial in accounting for these developments. Within a signal extraction framework, we attempt to match survey data on long-term projected output growth. Our calibrated model can account for about two-thirds of the rise in the investment share of output, and over half of the deterioration in the trade balance over this period
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