An unobserved components model of total factor productivity and the relative price of investment

Authors

Joshua C.C. Chan, Mitch Daniels School of Business
Edouard Wemy, Clark UniversityFollow

Document Type

Article

Abstract

This paper applies the common stochastic trends representation approach to the time series of total factor productivity (TFP) and the relative price of investment (RPI) to investigate the modeling of neutral technology (NT) and investment-specific technology (IST) and its econometric ramifications on the analysis of general equilibrium model. The permanent and transitory movements in both series are estimated efficiently via Markov chain Monte Carlo methods using band matrix algorithms. The results indicate that TFP and the RPI are, each, well represented by a differenced first-order autoregressive process. In addition, their time series share a common trend component that we interpret as reflecting changes in general purpose technology. These results are consistent with studies that suggest that (1) the traditional view of assuming that NT and IST follow independent processes is not supported by the features of the time series and (2) improper specification of secular trends may distort estimation and inference. Notably, the findings provide some guidance to minimize the effect of idiosyncratic and common trend misspecifications on the analysis of impulse dynamics and propagation mechanisms in macroeconomic models.

Publication Title

Macroeconomic Dynamics

Publication Date

7-2023

Volume

27

Issue

5

First Page

1397

Last Page

1423

ISSN

1365-1005

DOI

10.1017/S1365100522000281

Keywords

Business Cycles, Investment-Specific Technological Change, Total Factor Productivity, Unobserved Components Model

Repository Citation

Chan, Joshua C.C. and Wemy, Edouard, "An unobserved components model of total factor productivity and the relative price of investment" (2023). Economics. 215.
https://commons.clarku.edu/faculty_economics/215

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

Copyright Conditions

Chan, J. C., & Wemy, E. (2023). An unobserved components model of total factor productivity and the relative price of investment. Macroeconomic Dynamics, 27(5), 1397-1423. https://doi.org/10.1017/S1365100522000281