Why is productivity procyclical? Why do we care?

Susanto Basu and John Fernald ()

No WP-00-11, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: Productivity rises in booms and falls in recessions. There are four main explanations for this 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. Recent macroeconomic literature views this stylized fact of procyclical productivity as an essential feature of business cycles because each explanation has important implications for macroeconomic modeling. In this paper, we discuss empirical methods for assessing the importance of these four explanations. We provide microfoundations for our preferred approach of estimating an explicitly 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 also argue that the reallocation effects that we identify are not \"biases\" -- 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; from a positive viewpoint, they constitute potentially important amplification and propagation mechanisms for macroeconomic modeling.

Keywords: Productivity; Business cycles (search for similar items in EconPapers)
Date: 2000
New Economics Papers: this item is included in nep-dge, nep-eff and nep-tid
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Citations: View citations in EconPapers (34)

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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? (1999)
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