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The information content of capacity utilization for detrending total factor productivity

Christophe Planas (), W. Roeger and Alessandro Rossi ()

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 3, 577-590

Abstract: In the production function approach, an accurate output gap assessment requires a careful evaluation of the total factor productivity (TFP) cycle. We build a common cycle model that links TFP to capacity utilization and we show that, in almost all of the pre-enlargement EU countries, using information about capacity utilization reduces both the total estimation error and the revisions in real-time estimates of the concurrent TFP cycle compared to a univariate decomposition. We also argue that relaxing the constant drift hypothesis in favour of a non-linear specification helps to offset a general tendency to underestimate the TFP cycle in the last decade.

Keywords: Cobb–Douglas production function; Markov-switching and mixture innovation models; Real-time; Revisions (search for similar items in EconPapers)
JEL-codes: C32 C51 D24 E32 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1016/j.jedc.2012.09.005

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:3:p:577-590