Working Paper: NBER ID: w13499
Authors: Ellen R. McGrattan; Edward C. Prescott
Abstract: The basic neoclassical growth model accounts well for the postwar cyclical behavior of the U.S. economy prior to the 1990s, provided that variations in population growth, depreciation rates, total factor productivity, and taxes are incorporated. For the 1990s, the model predicts a depressed economy, when in fact the U.S. economy boomed. We extend the base model by introducing intangible investment and non-neutral technology change with respect to producing intangible investment goods and find that the 1990s are not puzzling in light of this new theory. There is compelling micro and macro evidence for our extension, and the predictions of the theory are in conformity with U.S. national products, incomes, and capital gains. We use the theory to compare current accounting measures for labor productivity and investment with the corresponding measures for the model economy with intangible investment. Our findings show that standard accounting measures greatly understate the boom in productivity and investment.
Keywords: Intangible investment; Neoclassical growth model; U.S. economy 1990s; Productivity; Capital gains
JEL Codes: E24; E32; O47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| intangible investment (E22) | economic performance (P17) |
| intangible investment (E22) | total factor productivity (TFP) (D24) |
| unmeasured investments (R&D, sweat equity) (E22) | capital gains (H24) |
| intangible investment (E22) | productivity growth (O49) |
| intangible investment (E22) | economic activity (E20) |
| traditional measures of productivity and investment (E22) | underestimation of economic activity (E26) |