Investment-specific Technological Change Research Articles

Optimal Taxation and Investment‑ Specific Technological Change

In this paper, we look at the relationship between Investment Specific Technological Change (ISTC) and optimal level of labor income progressivity. We develop an incomplete markets overlapping generations model that matches relevant features of the US economy and find that the observed drop in the relative price of investment since the 1980’s leads optimal progressivity to increase. This result hinges on ISTC increasing the wage premium through an increase in the variance of the permanent component of labor income. This result is supported by recent findings in the literature that highlight the increasing role of the permanent component of labor income in the observed increase in income inequality.

The Rise of Services and Balanced Growth in Theory and Data

We investigate the effect of structural transformation on the process of economic growth. Using a two-sector growth model we show that, in addition to Baumol’s cost disease, structural transformation from goods to services generates other predictions that are in line with cross-country growth facts: an increase in the real investment rate, a decline in the real interest rate and the marginal product of capital, and an acceleration of investment-specific technological change as the share of services increases. The model calibrated to US data can account for the elasticity of real investment rates to the share of services measured in cross-country data. (JEL E22, E23, E43, L16, O33, O41, O47)

An RBC model with investment-specific technological change: lessons for Bulgaria (1999–2018)

ABSTRACT We introduce investment-specific technological change (ISTC) into an otherwise standard real-business-cycle setup with a government sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999–2018). We then investigate the quantitative importance of the ISTC process in such a model for cyclical fluctuations in Bulgaria, and compare the results to a setup where cycles are driven by shocks to total factor productivity. We find that the model with ISTC shocks matches Bulgarian data better than the standard model driven by changes to total factor productivity only. The ISTC process is thus a better candidate for a a ”technology shock generation process,” at least in Bulgaria since the 2000s.

Investment-specific productivity and the role of imported equipment in Latin America

ABSTRACT We measure the contribution of imported equipment to labour productivity growth in 12 Latin American countries between 1970 and 2016, accounting for investment-specific technological change embodied in equipment. We link investment-specific technological change with falling relative equipment prices and construct its empirical counterpart by combining observations from each country’s transport, machinery, computers and communication equipment with household consumption data. By excluding structures from our relative equipment price series, we produce more precise growth decompositions, separating investment-specific technological change in equipment from the traditional, Hicks-neutral form of technological progress. Our results show significant variation in the contribution of imported equipment to growth across Latin America. Within country, matched-pair tests indicate that all factors, including imported equipment, make positive and significant contributions to growth. However, cross-country heterogeneity makes identifying significant contributors difficult in a pooled sample.

The Changing Structure of Government Consumption Spending

We document a secular increase in the share of purchases from the private sector in government consumption spending: over time the government purchases relatively more private-sector goods, and relies less on its own production of value added. We build a general equilibrium model in which investment-specific technological change accounts for the changing structure of government spending. The model predicts that this secular process alters the transmission of government spending shocks by raising the response of private value added, while dampening the response of hours. We validate these results with novel empirical evidence on the effects of government spending across countries.

Servicification of Investment and Structural Transformation: The Case of China

Structural transformation is a key feature of economic development. Traditional literature attributes it to changes in the sectoral composition of consumption. Different from it, we argue that the servici fication of investment goods, which is induced by investment-specific technological change, becomes an increasingly important reason for structural transformation, particularly for the rise of the services economy. Our study of the input output tables finds that the share of service inputs in investment goods have grown significantly in many countries since the 1980s, especially for investment-intensive economies such as China. To assess if the investment channel is quantitatively significant, we build a standard model with three broad sectors, but instead add an investment production function employing factors from all three sectors. Moreover, we incorporate investment-specific technological change by allowing the productivities of the three sectoral inputs to evolve over time. We calibrate the model to the Chinese economy from 1981-2014 and perform counter-factual experiments accordingly. We find that the technological change in the investment sector accounts for 33.1 percent decline in employment share of agriculture, 36.0 percent increase in employment share of manufacturing and 31.5 percent increase in employment share of services over the period. The magnitude of this effect on the share of services keeps growing, particularly after 2000. Our findings are not unique for China, but also apply to other economies experiencing servici fication of investment sector.

ICT investment-specific technological change and productivity growth in Korea: Comparison of 1996–2005 and 2006–2015

This paper analyses the impact of information and communications technology (ICT) on the productivity growth in Korea with the dynamic general equilibrium (DGE) model including investment-specific technological change. According to the balanced growth path analysis, ICT investment-specific technological change accounts for 18.8% to labor productivity growth in 1995–2005, then 14.3% in 2006–2015, and the decline in the rate of ICT investment-specific technological change has contributed to the slow productivity growth since the mid-2000s. In cyclical fluctuations, ICT investment-specific technological shocks were significant in output variance in 1996–2005, but neutral technological shocks and non-ICT investment specific shocks became dominant in 2006–2015. In sum, it can be concluded that the impacts of ICT investment-specific technology have diminished in the growth path and cyclical fluctuations. The result that increased (decreased) ICT investment intensity with faster (slower) ICT investment-specific technological change lead to higher (lower) productivity growth indicates that Korea has been a case against the productivity paradox, and sustained technological progress in ICT and expansion of ICT usage could have boosted the productivity growth. Therefore, this study implies that facilitating ICT progress and ICT usage outside of the already well-performing ICT manufacturing can help Korean economy raise the productivity growth rate.

Investment, Technological Progress and Energy Efficiency

In this paper we propose a macroeconomic model where energy intensity at the macro level responds to changes in energy prices and technological innovations. In our theory those changes operate through the choice of energy efficiency, which is embodied in new vintages of capital that differ due to Investment Specific Technological Change. Higher ISTC acts as an energy saving device. If energy prices stay constant, a permanent increase in the growth rate of ISTC may rise energy intensity in the long run, producing a rebound effect. This is so because the combination of higher ISTC growth rate and constant energy prices makes agents to choose less energy efficient capital goods. This may not be the case with rising energy prices. Thus, our theory can be used to test when and how we should see a rebound effect in energy use at the aggregate level and can be used to evaluate the aggregate effect of any policy aiming to reduce energy use.

Factor income taxation, growth, and investment specific technological change

Why do countries with different tax arrangements exhibit the same growth rate? We refer to this as a growth-tax puzzle. To explain the puzzle, we construct a tractable endogenous growth model with endogenous investment specific technological change (ISTC). Public and private capital stock externalities are assumed to augment ISTC. A specialized labor input exerts a positive externality in final good production. Our primary interest is to highlight the role of such externalities in explaining the puzzle. We show that the competitive equilibrium growth rate can be decomposed into a labor factor and a capital factor. Changes in factor income taxes, by affecting these factors, can have opposing effects leading to constancy in growth. Our model builds on the existing endogenous growth literature by providing an alternative, but compatible explanation for the offsetting growth effects of fiscal policy on growth observed in the data.

Investment-Specific Technological Change and the Brazilian Macroeconomy

This study discusses the importance of investment-specific technological change for the brazilian macroeconomy. We document evidence that a model that takes this specific type of technical progress into account is better suited to explain the Brazilian economy over the long term. We then present a DSGE [Dynamic Stochastic General Equilibrium] model with two sectors that incorporates technical progress in the investment goods sector and estimate the model for Brazil. The results demonstrate that productivity shocks in the investment goods sector are more volatile and persistent than in the final goods sector and that the output gap has a greater variance in the two-sector model. In addition, these results recommend a more rigorous monetary policy prescription to improve the economy’s well-being.

Capital-Specific Technological Change and Human Capital Accumulation in a Model of Export-Led Growth

This paper contributes to the literature on economic growth by seeking to join several lines of research on structural factors in a more fully specified framework, on the one hand, and by making this more inclusive supply side to interact with demand factors in a model of export-led growth, on the other hand. Balance-of-payments constraints influence the adoption of investment-specific technological change which requires the import of capital goods, while the sectoral allocation of physical and human capital is likewise revealed to be crucial for growth, both results having important policy implications. Among the latter, the fact that the growth path of the traditional sectors is positively related to the growth rate of exports. The higher the fraction of the production of non-durable consumption goods that is exported, the stronger the impact of a change in the growth rate of exports on the growth rates of the production of non-durable consumption and capital goods. JEL Codes: O11, O33, O41

Editors’ Introduction

Editors’ Introduction

Dynamic Analysis of an Endogenous Growth Model with Investment-specific Technological Change

This paper examines a dynamically optimal subsidy policy in a continuous-time version of the endogenous growth model developed by Krusell (Krusell, P. (1998) “Investment-Specific R&D and the Decline in the Relative Price of Capital”, Journal of Economic Growth, vol. 3, no. 2, pp. 131–141), in which investment-specific technological progress occurs endogenously because of R&D performed by monopolistic firms. It is demonstrated that a combination of the time-invariant subsidy for investment and the time-variant subsidy for R&D enables the market equilibrium to replicate the socially optimal allocation.

STOCHASTIC GROWTH IN THE UNITED STATES AND EURO AREA

This paper estimates, using data from the United States and the Euro Area, a two-country stochastic growth model in which both neutral and investment-specific technology shocks are nonstationary but cointegrated across economies. The results point to large and persistent swings in productivity, both favorable and adverse, originating in the United States but not transmitted to the Euro Area. More specifically, the results suggest that while the Euro Area missed out on the period of rapid investment-specific technological change enjoyed in the United States during the 1990s, it also escaped the stagnation in neutral technological progress that plagued the United States in the 1970s.

IDENTIFYING THE ROLE OF RISK SHOCKS IN THE BUSINESS CYCLE USING STOCK PRICE DATA

I analyze the sources of U.S. business cycle fluctuations in an estimated Dynamic Stochastic General Equilibrium model with a rich set of nominal and real rigidities and various exogenous disturbances. The model includes a shock to the expected risk-premium, which introduces a time-varying wedge between the policy rate set by the central bank and the cost-of-capital of firms. In the aggregate data, most U.S. corporations finance their investment using internal funds, and stock prices reveal the opportunity cost of this type of financing. I therefore use corporate market value and dividend data in the Bayesian estimation of the model to identify risk shocks. Variance decomposition exercises show that these shocks account for a substantial part of the variation in the stock market, as well as the variation in output and investment, especially at short forecast horizons. The variation of these variables at longer forecast horizons are mainly captured by shocks to investment-specific technological change. Historical decomposition points to the important role played by risk shocks in the run up of stock prices and output in the late 90s, and in the reversal of these variables in the early 2000s and during the recent recession. (JEL E32, E44)

Comment

Comment

TECHNOLOGICAL SOURCES OF PRODUCTIVITY GROWTH IN GERMANY, JAPAN, AND THE UNITED STATES

In this paper we use a dynamic general equilibrium growth model to quantify the contribution to productivity growth from different technological sources in the three leading economies of the world: Germany, Japan, and the United States. The sources of technology are classified into neutral progress and investment-specific progress. The latter can be split into two different types of equipment: information and communication technologies (ICT) and non-ICT equipment. We find that in the long run, neutral technological change is the main source of productivity growth in Germany and Japan. For the United States, the main source of productivity growth arises from investment-specific technological change, mainly associated with ICT. We also find that a non-negligible part of productivity growth in the three countries has been due to the technology specific to non-ICT equipment.

Is the real price of equipment a good measure for investment-specific technological change?

This paper shows that the real price of equipment is significantly affected by other shocks orthogonal to investment-specific technology shock. This finding questions the use of the real price of equipment as a measure of investment-specific technology shock.

Investment Based Valuation and Managerial Expectations

A generalized version of the standard neoclassical investment model can explain the relatively high equity prices in the late 1990s and early 2000s in the US corporate nonfinancial and NASDAQ sectors along with the relatively low prices before and after this period. Stock returns predicted by the model are as volatile as the observed stock returns in both sectors. Three key model assumptions are multiple capital goods, investment-specific technological change and non-quadratic adjustment costs. During the “bubble” period, investment in equipment is relatively high — consistent with high expected cash flows and high prices. Investment rates subsequently fall — consistent with lower expected cash flows and lower prices. On average, managers’ forecasts are correct. Levels and changes in managerial expectations are correlated with proxies for investor sentiment. Increases in the growth rate of equipment investment coincide with decreases in measured productivity growth. This is consistent with the unobserved diversion of labor from producing output towards accumulating human capital or other intangible assets.

Expectations Driven Business Cycles Featuring Growth Asymmetries

Recent evidence suggests that agents' expectations may have played a role in several cyclical episodes such as the U.S. new economy boom in the late 1990s and the real estate boom in Japan in the 1980s. These business cycles feature long and gradual boom and sharp bust phases. Existing expectations driven business cycle models cannot reproduce this kind of growth asymmetry. This paper uses a neoclassical vintage capital model and introduces learning about future investment-specific technological change to capture the growth asymmetry in expectations driven cycles. The precision of information varies endogenously with the cycle. Agents learn faster in booms than in recessions as in Van Nieuwerburgh and Veldkamp (2006) and consequently form forecasts about tomorrow's productivity of newly installed capital that vary in accuracy. Simulation results show that the model with learning displays longer and more gradual booms as well as sharper bust phases than a model which excludes learning. It replicates the skewness of output, employment and capital observed in the data.