Tracking the New Economy: Using Growth Theory to Detect Changes in Trend Productivity

45 Pages Posted: 31 Mar 2006

See all articles by James A. Kahn

James A. Kahn

Yeshiva University; National Bureau of Economic Research (NBER)

Robert W. Rich

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: January 2003

Abstract

The acceleration of productivity since 1995 has prompted a debate over whether the economy's underlying growth rate will remain high. In this paper, we propose a methodology for estimating trend growth that draws on growth theory to identify variables other than productivity - namely consumption and labor compensation - to help estimate trend productivity growth. We treat that trend as a common factor with two regimes high-growth and low-growth. Our analysis picks up striking evidence of a switch in the mid-1990s to a higher long-term growth regime, as well as a switch in the early 1970s in the other direction. In addition, we find that productivity data alone provide insufficient evidence of regime changes; corroborating evidence from other data is crucial in identifying changes in trend growth. We also argue that our methodology would be effective in detecting changes in trend in real time: In the case of the 1990s, the methodology would have detected the regime switch within two years of its actual occurrence according to subsequent data.

Keywords: productivity growth, regime-switching, neoclassical growth model, factor model

JEL Classification: O4, O51, C32

Suggested Citation

Kahn, James A. and Rich, Robert W., Tracking the New Economy: Using Growth Theory to Detect Changes in Trend Productivity (January 2003). Staff Report No. 159, Available at SSRN: https://ssrn.com/abstract=894288 or http://dx.doi.org/10.2139/ssrn.894288

James A. Kahn (Contact Author)

Yeshiva University ( email )

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Robert W. Rich

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

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