DP14438 Utilization-Adjusted TFP Across Countries: Measurement and Implications for International Comovement

Author(s): Zhen Huo, Andrei A. Levchenko, Nitya Pandalai-Nayar
Publication Date: February 2020
Keyword(s): international comovement, Solow residual, TFP, Utilization
JEL(s): F41, F44
Programme Areas: International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14438

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 featuring variable factor utilization 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 discuss the implications for international business cycle comovement generated by technology shocks. Unlike the Solow residual, utilization-adjusted TFP is virtually uncorrelated across countries, and as a result its direct contribution to GDP comovement is negligible. A general equilibrium model calibrated to the observed levels of international trade cannot generate much comovement through propagation of these TFP shocks.