Working Paper: NBER ID: w23233
Authors: Ellen R. McGrattan
Abstract: Because firms invest heavily in R&D, software, brands, and other intangible assets—at a rate close to that of tangible assets—changes in measured GDP, which does not include all intangible investments, understate the actual changes in total output. If changes in the labor input are more precisely measured, then it is possible to observe little change in measured total factor productivity (TFP) coincidentally with large changes in hours and investment. This mismeasurement leaves business cycle modelers with large and unexplained labor wedges accounting for most of the fluctuations in aggregate data. To address this issue, I incorporate intangible investments into a multi-sector general equilibrium model and parameterize income and cost shares using data from an updated U.S. input and output table, with intangible investments reassigned from intermediate to final uses. I employ maximum likelihood methods and quarterly observations on sectoral gross outputs for the United States over the period 1985–2014 to estimate processes for latent sectoral TFPs—that have common and sector-specific components. Aggregate hours are not used to estimate TFPs, but the model predicts changes in hours that compare well with the actual hours series and account for roughly two-thirds of its standard deviation. I find that sector-specific shocks and industry linkages play an important role in accounting for fluctuations and comovements in aggregate and industry-level U.S. data, and I find that the model’s common component of TFP is not correlated at business cycle frequencies with the standard measures of aggregate TFP used in the macroeconomic literature.
Keywords: Intangible Capital; Productivity; Business Cycles
JEL Codes: D57; E32; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in GDP (excluding intangible investments) (E20) | Underestimation of actual total output changes (E23) |
| Incorporating intangible investments into a multisector general equilibrium model (E22) | Predict changes in hours that closely align with actual data (C41) |
| Sector-specific shocks and industry linkages (F41) | Fluctuations in aggregate and industry-level data (E30) |
| Common component of TFP (derived from the model) (D24) | No correlation at business cycle frequencies with standard aggregate TFP measures (E39) |
| Intangible investments (E22) | Different cyclical properties compared to tangible investments (E32) |
| Intangible investments lagging the cycle by several quarters (E22) | Impact on productivity measurements (D20) |
| Financial market disturbances (E44) | Smaller and less volatile implied labor wedges in the multisector model (J49) |
| Multisector model (E10) | Minimal impact of financial shocks on real activity (E44) |