Ideas, Idea Processing, and TFP Growth in the US: 1899 to 2019
67 Pages Posted: 29 Jul 2022
Date Written: July 13, 2022
Innovativity - an economy's ability to produce the innovations that drive total factor productivity (TFP) growth - requires both ideas and the ability to process those ideas into new products and/or techniques. We model innovativity as a function of endogenous idea processing capability subject to an exogenous idea supply constraint and derive an empirical measure of innovativity that is independent of the TFP data itself. Using exogenous shocks and theoretical restrictions, we establish that: i) innovativity predicts the evolution of average TFP growth; ii) idea processing capability is the binding constraint on innovativity; and iii) average TFP growth declined after 1970 due to a constraints on idea processing capability, not idea supply.
Keywords: Innovation, Financial Market Effectiveness, Endogenous Growth, Total Factor Productivity
JEL Classification: O44, O43, O47, O16, O51, O31
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