Total Factor Productivity Shocks Research Articles

Cycles and their important shocks: completing the investigation

Abstract The paper looks at the question of measuring the importance of shocks to cycles. We consider two types of cycles - oscillations and those summarized by the NBER that require a study of growth in activity to establish turning points in the level of activity. The latter demarcate expansions and contractions. We establish a connection between these two concepts of cycles that shows shocks may have very different effects on each. As an application we look at a question that has often been asked over how important technology shocks are to cycles in activity? Some recent research concludes that total factor productivity (TFP) shocks are not important for oscillations and therefore models should be designed to reflect that. Using the same data we show that TFP shocks are very important to both types of cycles.

The regional pervasiveness of local productivity shocks on macroeconomic output in Europe

ABSTRACT This paper studies inter-regional technology spillover in EU-28 countries and shows how regional total factor productivity (TFP) shocks shape aggregate productivity in Europe. This paper provides evidence that several regions play a significant role as common factors in the production function of almost every other region. We provide a procedure to identify and test these regions through inter-regional trade flows. In our estimations, the ten most pervasive regions out of 272 NUTS 2 regions explain about 12% of the total factor productivity growth in the EU-28 countries. Significant heterogeneity exists in the region’s ability to absorb imported knowledge among these countries. Local knowledge stock’s contribution is limited compared to imported knowledge due to a regional disparity in R&D distribution. Our work contributes to understanding the granular features of spatial macroeconomics, with a particular focus on inter-regional trade flows and knowledge spillovers.

AN ASSESSMENT ON THE MONETARY BUSINESS CYCLE THEORY

In recent years, considerable attention has given to analyzing the business cycle in terms of money. Many researchers have developed dynamic stochastic general equilibrium models that generate business cycle facts and guide for making monetary policy decisions. The aim of this study is to investigate how the persistence of total factor productivity (TFP) and money growth shocks drive the business cycles within an economy. To achieve this aim, we employ a monetary business cycle model with a cash-in-advance constraint, as in Cooley and Hansen (1995). Our results indicate that the volatility of macroeconomic variables is higher when the persistence of TFP shocks is greater compared to that of money growth shocks. Furthermore, TFP shocks seem to have a more significant role in driving variability within the models compared to money growth shocks. This is demonstrated by the higher percentage of variance decomposition attributed to TFP shocks, except in the case of consumption variability.

Research on the Impact of Industrial Digitalization on High-Quality Economic Development: Evidence from China

This paper presents a New Keynesian dynamic stochastic general equilibrium model with price stickiness, employing macro-quarterly data and Bayesian estimation for parameter estimation. The study dissects the impact of industrial digitalization into three key components: total factor productivity shock, investment marginal efficiency shock, and capital-to-labor substitution shock. The paper then analyzes the mechanism through which industrial digitalization influences the high-quality development of the economy using impulse response analysis and historical variance decomposition. The result shows that: In terms of economic growth, all three types of shocks resulting from industrial digitalization contribute to output expansion, with the investment marginal efficiency shock rapidly boosting output in the short term. However, the technology shock has the most noticeable long-term effect on output growth. In the labor market, the investment marginal efficiency shock positively impacts employment and wages. The effects of the technology shock and capital-to-labor substitution shock on employment and wages first show suppression before enhancement. In the commodity market, the three shocks exert more pronounced effects in the medium and long term, bolstering investment and consumption to varying degrees. In light of these findings, policy recommendations include promoting the development of digital infrastructure, implementing proactive employment policies, offering robust industrial support for the digitalization of traditional enterprises, and fostering a favorable market environment.

The Time‐Varying Response of Hours Worked to a Productivity Shock

AbstractThis paper revisits the dynamic response of hours worked to a total factor productivity (TFP) shock. I estimate a structural vector autoregression that includes time‐varying parameters and stochastic volatility. The estimation produces structural parameters that are consistent with the long‐run identification. The impulse response functions of hours worked to a TFP shock are negative on impact and at the business cycle horizons. This is evidence that Galí (1999) would interpret as supporting new Keynesian theory. My results also show that TFP shocks are the dominant source of variation in average labor productivity. Structural changes in the U.S. economy play an important role in the TFP–hours worked relationship.

Heterogeneous stock traders, endogenous bubbles, and economic fluctuations

The impact of stock market bubbles on the real economy has always been an important topic. By introducing heterogeneous transactions of behavioral economics into a standard dynamic stochastic general equilibrium (DSGE) model, this paper finds, first, that heterogeneous trading behaviors cause an endogenous stock bubble. Second, the endogenous inverted U-shaped bubble affects the real economy through the borrowing constraint channel, which causes an inverted U-shaped output and promotes the output to rise against the decline of the total factor productivity (TFP) shock. Third, the positive bubble and increasing bubble dominate in promoting the output and investment of the real economy.

Migration and urban economic dynamics

What generates the large amount of heterogeneity and persistence in U.S. city growth rates? To answer this question we construct a dynamic general equilibrium model of urban migration that is consistent with the approximately linear relation between gross and net migration rates that we uncover in a panel of 381 metropolitan statistical areas. Consistency with this relation together with the model’s structure of moving costs delivers a parsimonious reduced form in which competitive equilibrium allocations are given by the solution to a city’s social planner problem subject to quadratic population adjustment costs. A calibrated version of the model indicates that empirically measured total factor productivity shocks account for most of the short-run and long-run population dynamics observed in U.S. data.

In no uncertain terms: The effect of uncertainty on credit frictions and monetary policy

We examine the interaction of uncertainty and credit frictions in a New Keynesian framework. The model considers credit frictions arising from costly-state verification in the provision of loans to fund the acquisition of capital by entrepreneurs and includes three types of time-varying stochastic volatility shocks related to monetary policy uncertainty, financial risk (micro uncertainty), and macro uncertainty. Key parameters are estimated by the simulated method of moments using data from the United States from 1984:Q1 until 2014:Q4. We find that (1) micro uncertainty has first-order effects that are significantly larger than the effects of macro uncertainty and monetary policy uncertainty; (2) poor credit conditions exacerbate the economic drag from micro uncertainty shocks, amplify the effects of monetary policy shocks, and mitigate the impact of total factor productivity (TFP) shocks; (3) a degree of asymmetry and nonscalability appears in response to monetary policy shocks depending on the degree of nominal rigidities and initial conditions; and (4) monetary policy uncertainty accounts for about one-third of business cycle volatility largely by affecting the size of monetary policy shocks.

The Relationship Between Debt and Output

We empirically investigate the dynamic relationship between debt and output in a panel of 72 countries over the period 1970–2014 using a vector autoregression. We document two puzzling empirical findings that contrast with what is predicted by a standard small open economy model by Aguiar and Gopinath (J Polit Econ 115(1):69–102, 2007), where debt and output endogenously respond to total factor productivity shocks. First, developing countries’ debt falls after a positive output shock, while the model predicts a debt expansion. Second, output declines in developed and developing countries after a debt shock, while the model predicts higher output. The relationship between debt and output depends on the sector taking on debt (households, firms, or governments) and the source of financing (domestic versus external) and differs across countries with varying degrees of economic development or different exchange rate regimes.

Progressive Taxation and Economic Stability*

AbstractRecent empirical evidence finds that progressive taxation is an effective economic stabilizer, but theoretical results disagree. This paper shows that a lifecycle model with total factor productivity shocks can match the empirical evidence. If the US economy switched from progressive to proportional taxation, output volatility would increase by 5 percent. Progressive taxes act as stabilizers by reducing income volatility among the young and soon‐to‐be retirees. Thus, incorporating a rich lifecycle structure in the model is important to match the data. The model is then used to study the welfare implications of reducing tax progressivity.

The Cyclical Behavior of the Price‐Cost Markup

AbstractA countercyclical markup of price over marginal cost is a key transmission mechanism for demand shocks in New Keynesian (NK) models. This paper reexamines the foundation of those models by studying the cyclicality of the price‐cost markup in the private economy. We find that how the markup is measured matters for its unconditional cyclicality. Measures of the markup based on the inverse of the labor share are moderately procyclical, but are moderately countercyclical for some generalizations of the production function. NK models predict that the cyclicality of the markup should vary depending on the nature of the shock. Consistent with the NK model, we find that the markup is procyclical conditional on total factor productivity shocks and countercyclical conditional on investment‐specific technology shocks. In contrast, we find that the markup increases in response to a positive demand shock. Thus, the transmission mechanism for the effects of demand shocks in sticky‐price NK models is not consistent with the data.

Rental market and macroeconomics: evidence for the US

PurposeThe aim of this paper is to assess whether the inclusion of the rental housing market affect the dynamics of the real business cycles (RBCs).Design/methodology/approachFor this investigation, the authors model and estimate two dynamic stochastic general equilibrium (DSGE) versions for the US economy, one with and one without the presence of residential rent.FindingsThe findings provide evidence that the inclusion of the rental housing market can improve the assessment of public policies and the projection of scenarios in the face of sudden macroeconomic shocks. The addition of this secondary housing market augments the effect of total factor productivity (TFP) shock on output and consumption. In addition, it increases the effect of the credit shock on the demand for housing. The latter highlights the role of credit for the real estate market. Therefore, the authors recommend that analysts and macro-prudential authorities consider adding it to their models.Originality/valueThe findings provide evidence that the inclusion of the rental housing market can improve the assessment of public policies and the projection of scenarios in the face of sudden macroeconomic shocks.

Are Fiscal Multipliers Estimated with Proxy-SVARs Robust?

How large are government spending and tax multipliers? The fiscal proxy-SVAR literature provides heterogenous estimates, depending on which proxies - fiscal or non-fiscal - are used to identify fiscal shocks. We reconcile the existing estimates via a flexible vector autoregressive model that allows to achieve identification in presence of a number of structural shocks larger than that of the available instruments. Our two main findings are the following. First, the estimate of the tax multiplier is sensitive to the assumption of orthogonality between total factor productivity (non-fiscal proxy) and tax shocks. If this correlation is assumed to be zero, the tax multiplier is found to be around one. If such correlation is non-zero, as supported by our empirical evidence, we find a tax multiplier three times as large. Second, we find the spending multiplier to be robustly larger than one across different models that feature different sets of instruments. Our results are robust to the joint employment of different fiscal and non-fiscal instruments.

Are macroeconomic policies better in curbing air pollution than environmental policies? A DSGE approach with carbon-dependent fiscal and monetary policies

The environmental impacts of macroeconomic policies, and their interaction with climate policies are under-researched in the existing literature. This paper compares the effectiveness of standard macroeconomic tools (fiscal and monetary policies) with carbon taxation in curbing air pollution by using an environmental dynamic stochastic general equilibrium (E-DSGE) model. We show how government expenditure, interest rate, and carbon tax rate should vary over time in order to stabilize carbon emission levels. We find that (i) while all the aforementioned policies could stabilize carbon emissions, their underlying mechanisms are different. Fiscal, monetary, and carbon tax policies, uniquely and respectively, lead to a reduction in abatement effort, income tax revenue, and general price level. (ii) With economic expansions driven by total factor productivity (TFP) shocks, fiscal policy is the only policy that could maintain the emission levels and simultaneously improve household welfare in term of consumption and labor. (iii) Regarding the interaction between carbon and macroeconomic policies, carbon taxation should complement monetary policy, while it should not respond to fiscal policy.

Collaborative optimal carbon tax rate under economic and energy price shocks: A dynamic stochastic general equilibrium model approach

Existing literature on climate policy analysis in an international environmental agreement does not condition the optimal policy on the economic conditions of the countries. This paper constructs a two-country environmental dynamic stochastic general equilibrium (E-DSGE) model to compare the optimal carbon tax rates between countries in noncooperative and cooperative scenarios in the presence of different economic shocks. Compared to those in the cooperative scenario, countries without cooperation would have an optimal carbon tax rate that increases less in response to a positive home-country total factor productivity (TFP) shock and decreases more in response to a positive energy price shock. Further, in the noncooperative scenario, the carbon tax rate decreases in response to the foreign-country TFP shock, but to a lesser extent than that in the cooperative scenario. Countries’ cooperation does not necessarily lead to a lower emissions stock. It decreases only in response to positive home- and foreign-country TFP shocks, and it increases in response to a positive energy price shock.

Regional inequality in the U.S.: Evidence from city‐level purchasing power

AbstractUsing quarterly data for 42 products over the period from 1990 to 2015, we find that there has been a large and growing dispersion of purchasing power across U.S. cities since 1990 and the dispersion varies widely across products. We also find that total factor productivity shock precedes or predicts the rise in regional inequality of purchasing power. We view that the growing regional inequality found in the purchasing power among U.S. cities might have proceeded after nationwide productivity shocks mainly by the cities with higher share of skilled workers through the products with more flexible price adjustments.

Tfpr: Dispersion and Cyclicality

This paper studies the determinants of TFPR, a revenue based measure of total factor productivity. Recent business cycle models are built upon the countercyclical dispersion of TFPR. But, the distribution of TFPR is endogenous, dependent upon other exogenous shocks and the endogenous determination of prices. This paper studies the determination the distribution of TFPR is an overlapping generations model with monopolistic competition and state dependent pricing. Changes in the mean and the dispersion of a quantity based measure of total factor productivity, TFPQ, and monetary shocks are analyzed as exogenous variations that influence the distribution of TFPR. None of these shocks alone can generate countercyclical dispersion in TFPR and match observed countercyclical dispersion in price changes and countercyclical movements in the frequency of price changes. Large enough shocks to the dispersion in TFPQ along with an appropriately responsive monetary policy can match these facts. But the required monetary feedback does not reproduce the positive correlation between money innovations and the dispersion in TFPR seen in the data. In this framework, uncertainty per se plays a very limited role. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Are Fiscal Multipliers Estimated with Proxy-SVARs Robust?

How large are government spending and tax multipliers? The fiscal proxy-SVAR literature provides heterogenous estimates, depending on which proxies - fiscal or non-fiscal - are used to identify fiscal shocks. We reconcile the existing estimates via a flexible vector autoregressive model that allows to achieve identification in presence of a number of structural shocks larger than that of the available instruments. Our two main findings are the following. First, the estimate of the tax multiplier is sensitive to the assumption of orthogonality between total factor productivity (non-fiscal proxy) and tax shocks. If this correlation is assumed to be zero, the tax multiplier is found to be around one. If such correlation is non-zero, as supported by our empirical evidence, we find a tax multiplier three times as large. Second, we find the spending multiplier to be robustly larger than one across different models that feature different sets of instruments. Our results are robust to the joint employment of different fiscal and non-fiscal instruments.

Technological Innovation, Intangible Capital, and Asset Prices

We review research on the asset pricing implications of models with innovation and intangible capital. In these models, technological innovation shocks propagate differently than standard total factor productivity shocks—and therefore have qualitatively distinct asset pricing implications. We discuss recent approaches to measuring intangible capital and innovation, many of which rely on the prices of financial securities. Last, we review models that explore the economic differences between intangible and innovation relative to other forms of investments—focusing on the role of human capital and cash-flow appropriability.

Time-varying wage risk, incomplete markets, and business cycles

Idiosyncratic wage risk exhibits cyclical variation. This study analyzes how such risk fluctuations affect business cycles. I use a heterogeneous agent model with uninsured idiosyncratic wage risk, indivisible labor, and a borrowing constraint. I introduce risk fluctuations as uncertainty shocks and calibrate those shocks using micro-level wage data in the United States. I find that uncertainty shocks affect labor market dynamics through ex-ante uncertainty and ex-post distribution effects. In particular, uncertainty shocks mainly influence the employment of low-productivity individuals, generating negative comovement between total hours worked and average labor productivity. Including uncertainty shocks in addition to aggregate total factor productivity shocks helps the model account for the weakly negative hours–productivity correlation and large fluctuations in the labor wedge seen in the United States.