Discussion paper

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

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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Citation

Huo, Z, A Levchenko and N Pandalai-Nayar (eds) (2020), “DP14438 Utilization-Adjusted TFP Across Countries: Measurement and Implications for International Comovement”, CEPR Press Discussion Paper No. 14438. https://cepr.org/publications/dp14438