Solow Residuals Without Capital Stocks

34 Pages Posted: 14 Nov 2010

See all articles by Michael C. Burda

Michael C. Burda

Humboldt University of Berlin - Faculty of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Battista Severgnini

Copenhagen Business School - Department of Economics

Date Written: September 2010

Abstract

Using synthetic data generated by a prototypical stochastic growth model, we explore the quantitative extent of measurement error of the Solow residual (Solow 1957) as a measure of total factor productivity (TFP) growth when the capital stock is measured with error and when capacity utilization and depreciation are endogenous. We propose two alternative measurements of TFP growth which do not require capital stocks: one measure eliminates the capital stock by direct substitution, while the other is based on generalized diff erences of detrended data and the Malmquist index. The root mean squared errors of these alternatives are as low as one third of those for the Solow-Tornqvist residual. Our comparative evaluations on artificial data indicate that measurement problems are severe, in particular for economies still far from their steady state. This drawback of the Solow residual is thus most acute in applications in which its accuracy is most highly valued. As an application, we compute and compare TFP growth estimates using data from the new and old German federal states.

Keywords: Malmquist index, measurement error, Solow residual, total factor productivity

JEL Classification: D24, E01, E22, O33, O47

Suggested Citation

Burda, Michael C. and Severgnini, Battista, Solow Residuals Without Capital Stocks (September 2010). CEPR Discussion Paper No. DP7990, Available at SSRN: https://ssrn.com/abstract=1707860

Michael C. Burda (Contact Author)

Humboldt University of Berlin - Faculty of Economics ( email )

Spandauer Strasse 1
D-10178 Berlin
Germany
+49 30 2093 5638/50 (Phone)
+49 30 2093 5696 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Battista Severgnini

Copenhagen Business School - Department of Economics ( email )

Porcelænshaven 16 A, 1
Frederiksberg C, DK-2000
Denmark

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