Computers and Growth with Costs of Adjustment: Will the Future Look Like the Past?

30 Pages Posted: 14 Dec 1999

See all articles by Michael T. Kiley

Michael T. Kiley

Board of Governors of the Federal Reserve System

Date Written: July 19, 1999

Abstract

This paper augments the traditional growth accounting framework by including a common specification of investment adjustment costs, and uses the new framework to examine the past and likely future growth in nonfarm business output in the US. The inclusion of adjustment costs can have large effects on the growth-accounting exercise when a new investment good is introduced -- such as computers in the last thirty years. The new framework indicates that the contribution of computers to economic growth has been held down by the large adjustment costs required to incorporate a new investment good into the economy's capital stock. Alternative calibrations of the model suggest that these adjustment costs have lowered measured growth in multifactor productivity since 1974 by about 1/2 percentage point -- a nontrivial percentage of the productivity slowdown. Combining the adjustments to multifactor productivity and the impact of computers implied by the model with adjustment costs boosts long-run growth in output per hour 3/4 percentage point above the 1974-1991 average.

JEL Classification: O4, E2

Suggested Citation

Kiley, Michael T., Computers and Growth with Costs of Adjustment: Will the Future Look Like the Past? (July 19, 1999). FEDS Working Paper No. 99-36. Available at SSRN: https://ssrn.com/abstract=186148 or http://dx.doi.org/10.2139/ssrn.186148

Michael T. Kiley (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-2448 (Phone)
202-452-5296 (Fax)

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