Working Paper: CEPR ID: DP14438
Authors: Zhen Huo; Andrei A. Levchenko; Nitya Pandalai Nayar
Abstract: This paper develops estimates of TFP growth adjusted for movements in unobserved factor utilization for a panel of 29 countries and up to 37 years. When factor utilization changes are unobserved, the commonly used Solow residual mismeasures actual changes in TFP. We use a general equilibrium dynamic multi-country multi-sector model to derive a production function estimating equation that corrects for unobserved factor usage. We compare the properties of utilization-adjusted TFP series to the standard Solow residual, and quantify the roles of both TFP and utilization for international business cycle comovement. Utilization-adjusted TFP is virtually uncorrelated across countries, and does not generate much GDP comovement through its propagation. Shocks to factor utilization can more successfully account for international comovement.
Keywords: TFP; Utilization; Solow Residual; International Comovement
JEL Codes: F41; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unobserved factor utilization (E23) | misrepresentation of actual changes in TFP (O49) |
| correlation of unobserved factor utilization changes (C29) | incorrect assessments of international business cycle comovement (F44) |
| utilization-adjusted TFP (O49) | virtually uncorrelated across countries (F29) |
| observed correlation in Solow residual (C29) | primarily due to correlated movements in unobserved factor utilization (J29) |
| TFP shocks (F16) | minimal GDP correlation (E20) |
| utilization shocks (D89) | significant GDP comovement (E20) |
| non-technology shocks affecting factor utilization (J29) | critical for understanding international business cycles (F44) |
| utilization shocks (D89) | more effective in explaining GDP comovement than TFP shocks (F62) |