Economics
Investment-specific technological changes: The source of long-run TFP fluctuations
Document Type
Article
Abstract
Technological innovations originating in the capital-producing sector may spillover to the rest of the economy and enhance aggregate TFP in the long-run. This paper assesses the quantitative importance of investment-specific technological changes in long-run movements in aggregate TFP. To this end, we construct a two-sector business cycle model where an IST diffusion process influences long-run movements in aggregate TFP via spillover. We then establish the linkage between the primitive shocks of the model and two shocks that can be identified from a VAR approach: one shock accounting for the long-run movement in aggregate TFP and the other accounting for the long-run movement in the inverse of the relative price of investment. We show analytically that the correlation of these two long-run shocks can be fruitful in distinguishing the quantitative importance of IST innovations in long-run movements in aggregate TFP. Using post-war U.S. data, we find that these two long-run shocks identified by the MFEV approach are almost perfectly collinear. Moreover, these two shocks can explain a significant, and surprisingly similar, fraction of the business-cycle fluctuations in other important macro variables. Our findings suggest that embodied technological changes are an important driver of long-run movements in aggregate TFP.
Publication Title
European Economic Review
Publication Date
11-2015
Volume
80
First Page
230
Last Page
252
ISSN
0014-2921
DOI
10.1016/j.euroecorev.2015.10.002
Keywords
business cycle, general purpose technology, investment-specific technological change, spillover, TFP
Repository Citation
Chen, Kaiji and Wemy, Edouard, "Investment-specific technological changes: The source of long-run TFP fluctuations" (2015). Economics. 218.
https://commons.clarku.edu/faculty_economics/218