Why is productivity procyclical? Why do we care?
Susanto Basu and
John Fernald (john.fernald@insead.edu)
No 638, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)
Abstract:
Productivity rises in booms and falls in recessions. There are four main explanations for procyclical productivity: (i) procyclical technology shocks, (ii) widespread imperfect competition and increasing returns, (iii) variable utilization of inputs over the cycle, and (iv) resource reallocations. Each of these explanations has important implications for macroeconomic modeling. In this paper, we discuss empirical methods for assessing the importance of these explanations. We provide microfoundations for our preferred approach of estimating a first-order approximation to the production function, using a theoretically motivated proxy for utilization. When we implement this approach, we find that variable utilization and resource reallocations are particularly important in explaining procyclical productivity. We argue that the reallocation effects that we identify are not \"biases\" - instead, they reflect changes in an economy's ability to produce goods and services for final consumption from given primary inputs of capital and labor. Thus, from a normative viewpoint, reallocations are significant for welfare, and from a positive viewpoint, they constitute potentially important amplification and propagation mechanisms for macroeconomic modeling.
Keywords: Productivity; Econometric models (search for similar items in EconPapers)
Date: 1999
References: Add references at CitEc
Citations: View citations in EconPapers (50)
Downloads: (external link)
http://www.federalreserve.gov/pubs/ifdp/1999/638/default.htm (text/html)
http://www.federalreserve.gov/pubs/ifdp/1999/638/ifdp638.pdf (application/pdf)
Related works:
Chapter: Why Is Productivity Procyclical? Why Do We Care? (2001) 
Working Paper: Why is productivity procyclical? Why do we care? (2000) 
Working Paper: Why Is Productivity Procyclical? Why Do We Care? (2000) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:638
Access Statistics for this paper
More papers in International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier (ryan.d.wolfslayer@frb.gov).