– Current Unpublished Working Papers
What Do We Know and Not Know about Potential Output?
2009-05 :: With Basu :: March 2009
+ abstract Potential output is an important concept in economics. Policymakers often use a one-sector neoclassical model to think about long-run growth, and often assume that potential output is a smooth series in the short run--approximated by a medium- or long-run estimate. But in both the short and long run, the one-sector model falls short empirically, reflecting the importance of rapid technical change in producing investment goods; and few, if any, modern macroeconomic models would imply that, at business cycle frequencies, potential output is a smooth series. Discussing these points allows us to discuss a range of other issues that are less well understood, and where further research could be valuable.
Measuring the Miracle: Market Imperfections and Asia's Growth Experience
2006-17 :: With Neiman :: May 2006
+ abstract The newly industrialized economies (NIEs) of Asia are the fastest-growing economies in the world since 1960. A clear understanding of their rapid development remains elusive, with continuing disputes over the roles of technology growth, capital accumulation, and international trade and investment. We reconcile seemingly contradictory explanations by accounting for imperfections in output and capital markets. For instance, in Singapore, growth-accounting studies using quantities (the primal approach) find rising capital-output ratios and a constant labor share; but studies using real factor prices (the dual approach) find a constant user cost. We provide evidence that "favored" firms reaped economic profits and received preferential tax treatment, subsidies, and access to capital--market imperfections that are difficult to capture when implementing the dual approach. Further, declining pure profits can reconcile the constant or rising labor shares in revenue in the NIEs with theories of international trade that predict falling labor shares in cost. We provide empirical support
for the quantitative importance of profits and heterogeneous user costs, describe the two-sector dynamics, and derive measures of technology growth, corrected for the imperfections that we quantify. We then discuss implications for broader disputes about Asian development.
A Quarterly Utilization-Adjusted Series on Total Factor Productivity
Manuscript :: August 2009
+ supplement
Sector-Specific Technical Change
Manuscript :: With Basu, Fisher, and Kimball :: April 2009
+ abstract Economic theory suggests that the economy's response to a technology shock depends on the final-use sector that it affects. We provide a unified framework for measuring innovations to final-goods technology using industry-level innovations and the input-output tables. Our approach enables us to relax and test the assumptions maintained in the literature on investment-specific technical change, which measures relative technologies using relative prices--assumptions that, we find, provide a poor approximation in the short run. We find that the dynamic responses of the economy are, in fact, very different for consumption versus investment shocks. In particular, improvements in investment technology lead to sharp and statistically significant declines in hours worked, investment, consumption and output. Consumption technology improvements lead to an immediate boost to consumption, investment, and output, and little effect on hours worked. These results are robust to adjusting the data to match the Gordon investment deflators (as extended by Cummins and Violante).
A General-Equilibrium Asset-Pricing Approach to the Measurement of Nominal and Real Bank Output
Manuscript :: With Basu and Wang :: June 2004
+ abstract This paper addresses the proper measurement of financial service output that is not priced explicitly. It shows how to impute nominal service output from financial intermediaries' interest income, and how to construct price indices for those financial services. We present an optimizing model with financial intermediaries that provide financial services to resolve asymmetric information between borrowers and lenders. We embed these intermediaries in a dynamic, stochastic, general-equilibrium model where assets are priced competitively according to their systematic risk, as in the standard consumption- capital- asset-pricing model. In this environment, we show that it is critical to take risk into account in order to measure financial output accurately. We also show that even using a risk-adjusted reference rate does not solve all the problems associated with measuring nominal financial service output. Our model allows us to address important outstanding questions in output and productivity measurement for financial firms, such as: (1) What are the correct "reference rates" one should use in calculating bank output? (2) If reference rates need to take account of risk, does this mean that they must be ex ante rates of return? (3) What is the right price deflator for the output of financial firms? Is it just the general price index? (4) When--if ever--should we count capital gains of financial firms as part of financial service output?
– Published Articles (Refereed Journals and Volumes)
Trend Breaks, Long-Run Restrictions, and Contractionary Technology Improvements
Journal of Monetary Economics 54(8), November 2007, 2467-2485
+ abstract Structural vector autoregressions with long-run restrictions are extraordinarily sensitive to low-frequency correlations. Recent literature finds that the estimated effects of technology shocks are sensitive to how one treats hours per capita. However, after allowing for (statistically and economically significant) trend breaks in productivity, results are much less sensitive: hours fall when technology improves. The issue is that the common high-low-high pattern of productivity growth and hours (i.e., the low-frequency correlation) inevitably leads to a positive estimated response. The trend breaks control for this correlation. This example suggests a practical need for care in using long-run restrictions.
+ supplement Information and Communications Technology as a General-Purpose Technology: Evidence from U.S Industry Data
German Economic Review 8(2), May 2007, 146-173 :: With Basu
+ abstract Many people point to information and communications technology (ICT) as the key for understanding the acceleration in productivity in the United States since the mid-1990s. Stories of ICT as a 'general-purpose technology' suggest that measured total factor productivity (TFP) should rise in ICT-using sectors (reflecting either unobserved accumulation of intangible organizational capital; spillovers; or both), but with a long lag. Contemporaneously, however, investments in ICT may be associated with lower TFP as resources are diverted to reorganization and learning. We find that U.S. industry results are consistent with general-purpose technology (GPT) stories: the acceleration after the mid-1990s was broad-based--located primarily in ICT-using industries rather than ICT-producing industries. Furthermore, industry TFP accelerations in the 2000s are positively correlated with (appropriately weighted) industry ICT capital growth in the 1990s. Indeed, as GPT stories would suggest, after controlling for past ICT investment, industry TFP accelerations are negatively correlated with increases in ICT usage in the 2000s.
Are Technology Improvements Contractionary?
American Economic Review 96(5), December 2006, 1418-1448 :: With Basu and Kimball
+ abstract Yes. We construct a measure of aggregate technology change, controlling for aggregation effects, varying utilization of capital and labor, nonconstant returns, and imperfect competition. On impact, when technology improves, input use and nonresidential investment fall sharply. Output changes little. With a lag of several years, inputs and investment return to normal and output rises strongly. The standard one-sector real-business-cycle model is not consistent with this evidence. The evidence is consistent, however, with simple sticky-price models, which predict the results we find: when technology improves, inputs and investment generally fall in the short run, and output itself may also fall.
+ supplement jfernald/BFK-Technology-Series.xls contains the main aggregate data series we constructed for the paper. It also contains industry technology estimates.
jfernald/Industry_BFK_Data.xls - contains additional underlying industry data. These include growth rates for gross output, value added, primary inputs, total inputs, and hours per worker; and factor shares.
The Case of the Missing Productivity Growth: Or, Does Information Technology Explain Why Productivity Accelerated in the United States but Not the United Kingdom?
NBER Macroeconomics Annual, 2003 :: With Basu, Oulton, and Srinivasan
Puzzles in the Chinese Stock Market
Review of Economics and Statistics, August 2002 :: With Rogers
Aggregate Productivity and Aggregate Technology
European Economic Review, June 2002 :: With Basu
Productivity Growth in the 1990s: Technology, Utilization, or Adjustment?
Carnegie-Rochester Series on Public Policy, December 2001 :: With Basu and Shapiro
Was China the First Domino? Assessing the Links between China and the Rest of Emerging Asia
Journal of International Money and Finance, August 1999 :: With Edison and Loungani
Roads to Prosperity? Assessing the Link between Public Capital and Productivity
American Economic Review, June 1999, 619-638
Returns to Scale in U.S. Manufacturing: Estimates and Implications
Journal of Political Economy, April 1997 :: With Basu
Are Apparent Productive Spillovers a Figment of Specification Error?
Journal of Monetary Economics, August 1995 :: With Basu
– FRBSF Publications
– Other Works
Comrades or Competitors? On Trade Relationships between China and Emerging Asia
Chicago Fed Letter 200, March 2004
The Role of Information Technology in the Acceleration in U.S. Total Factor Productivity after 1995
FRB Chicago Economic Perspectives 28, Q1 2004, 52-66 :: With Ramnath
China and Emerging Asia: Comrades or Competitors?
In The Post-Crisis Macroeconomic Adjustment in Asia. Proceedings from a conference hosted by the Seoul Journal of Economics, 2003 :: With Ahearne, Loungani, and Schindler
Information Technology and the U.S. Productivity Acceleration
Chicago Fed Letter 193, September 2003
A Discussion of Productivity Growth and Technology
In Technology, Growth, and the Labor Market, ed. by Ginther and Zavodny :: Netherlands: Kluwer Academic Publishers, 2002
Countering Contagion: Does China's Experience Offer a Blueprint?
FRB Chicago Economic Perspectives, Fall 2001 :: With Ahearne and Loungani
The Fall and Rise of the Global Economy
Chicago Fed Letter 164, April 2001 :: With Greenfield
Why Is Productivity Procyclical? Why Do We Care?
In New Directions in Productivity Analysis. Studies in Income and Wealth Vol. 63, ed. by Dean, Harper, and Hulten :: Chicago: University of Chicago Press, 2001 :: With Basu
Growth, Reform, and the Effects of the Asian Crisis on China
China Business Review, September 1999
Why Has China Survived the Asian Crisis So Well? What Risks Remain?
In Financial Market Reform in China: Progress, Problems, and Prospects, ed. by Chen, Dietrich, and Feng :: Westview Press, 1999 :: With Babson
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