Variance Properties of Solow's Productivity Residual and Their Cyclical Implications

72 Pages Posted: 13 Nov 2012

See all articles by Mary G. Finn

Mary G. Finn

Federal Reserve Banks - Federal Reserve Bank of Richmond

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 1994

Abstract

For the United States economy (1960-1989), the correlation between the growth rates of the Solow residual and the real price of energy (government spending) is -0.55 (0.09). The Solow residual confounds movements in energy prices and government spending with those in true technology. Why? To address this question, this study develops a model to see if it quantitatively captures the endogenous transmission mechanism underlying the observed Solow residual correlations. It does. The transmission mechanism depends on endogenous capital utilization. With this transmission mechanism in place, and with the occurrence of shocks to 'true' technology, energy prices, and government spending, the model economy accounts for 76 or 89 percent of U.S. output volatility, well matches the U.S. empirical regularities involving capital utilization and the Solow residual, and is generally consistent with other features of U.S. business cycles.

Suggested Citation

Finn, Mary G., Variance Properties of Solow's Productivity Residual and Their Cyclical Implications (February 1, 1994). Federal Reserve Bank of Richmond Working Paper No. 94-1, Available at SSRN: https://ssrn.com/abstract=2123616 or http://dx.doi.org/10.2139/ssrn.2123616

Mary G. Finn (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond

P.O. Box 27622
Richmond, VA 23261
United States
804-697-8266 (Phone)
804-697-8255 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
40
Abstract Views
1,522
PlumX Metrics