Unmeasured Investment and the Puzzling U.S. Boom in the 1990s

Ellen R. McGrattan and Edward C. Prescott

No 13499, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The basic neoclassical growth model accounts well for the postwar cyclical behavior of the U.S. economy prior to the 1990s, provided that variations in population growth, depreciation rates, total factor productivity, and taxes are incorporated. For the 1990s, the model predicts a depressed economy, when in fact the U.S. economy boomed. We extend the base model by introducing intangible investment and non-neutral technology change with respect to producing intangible investment goods and find that the 1990s are not puzzling in light of this new theory. There is compelling micro and macro evidence for our extension, and the predictions of the theory are in conformity with U.S. national products, incomes, and capital gains. We use the theory to compare current accounting measures for labor productivity and investment with the corresponding measures for the model economy with intangible investment. Our findings show that standard accounting measures greatly understate the boom in productivity and investment.

JEL-codes: E24 E32 O47 (search for similar items in EconPapers)
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Working Paper: Unmeasured investment and the puzzling U.S. boom in the 1990s (2009)
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