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Solow Residuals without Capital Stocks

Michael Burda () and Battista Severgnini ()

No SFB649DP2008-040, SFB 649 Discussion Papers from Humboldt University, Collaborative Research Center 649

Abstract: For more than fifty years, the Solow decomposition (Solow 1957) has served as the standard measurement of total factor productivity (TFP) growth in economics and management, yet little is known about its precision, especially when the capital stock is poorly measured. Using synthetic data generated from a prototypical stochastic growth model, we explore the quantitative extent of capital measurement error when the initial condition is unknown to the analyst and when capacity utilization and depreciation are endogenous. We propose two alternative measurements which eliminate capital stocks from the decomposition and significantly outperform the conventional Solow residual, reducing the root mean squared error in simulated data by as much as two-thirds. This improvement is inversely related to the sample size as well as proximity to the steady state. As an application, we compute and compare TFP growth estimates using data from the new and old German federal states.

Keywords: Total factor productivity; Solow residual; generalized differences; measurement error; Malmquist index (search for similar items in EconPapers)
JEL-codes: D24 E01 E22 O33 O47 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-eff and nep-mac
Date: 2008-08
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Related works:
Journal Article: Solow residuals without capital stocks (2014) Downloads
Working Paper: Solow Residuals without Capital Stocks (2010) Downloads
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