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Title: Utilization-Adjusted TFP Across Countries: Measurement and Implications for International Comovement

Author(s): Zhen Huo, Andrei A. Levchenko and Nitya Pandalai-Nayar

Publication Date: February 2020

Keyword(s): international comovement, Solow residual, TFP and Utilization

Programme Area(s): International Macroeconomics and Finance and Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Huo, Z, Levchenko, A and Pandalai-Nayar, N. 2020. 'Utilization-Adjusted TFP Across Countries: Measurement and Implications for International Comovement'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14438