Accounting for U.S. post-war economic growth

del Río, Fernando and Lores, Francisco-Xavier (2020): Accounting for U.S. post-war economic growth.

Abstract

We apply the Chari et al. (2002, 2007) methodology to develop a growth accounting exercise for the U.S. economy during 1954--2017. Unlike them, we focus on perfect foresight models. We obtain three primary findings. First, the efficiency wedges in the entire period accurately account for the evolution of U.S. productivity and labor share. Second, the labor wedge was the main force driving the recovery of output and worked hours per capita in the eighties and nineties as well as after the Great Recession. Finally, if we replace the Cobb-Douglas assumption with a production function, which allows the factor shares to adjust competitively, the forces driving the U.S. Great Recession might not be very different from those in other OECD economies, and the forces driving the 1982 recession in the United States.

• Item Type: MPRA Paper
• Language: English
• Keywords: Growth Accounting, Capital-Efficiency Wedge, Labor-Efficiency Wedge, Labor Wedge, Investment Wedge, Resource Constraint Wedge, Productivity, Labor Share, Worked Hours.
• Subjects: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity

References

Barro, R. J. and Sala-i-Martin, X. (1995). Economic Growth, McGraw Hill International Editions.

Brinca, P. (2014). Distortions in the Neoclassical Growth Model: A Cross Country Analysis. Journal of Economic Dynamics and Control, 47, 1-19.

Brinca, P. (2013). Monetary Business Cycle Accounting for Sweden. The B.E. Journal of Macroeconomics, 13(1), 2194-6116.

Brinca, P., Chari, V. V., Kehoe, P. J. and McGrattan, E. R. (2016). Accounting for business cycles. In Handbook of Macroeconomics (Vol. 2, pp. 1013-1063). Elsevier.

Cavalcanti, T. (2007). Business cycle and level accounting: the case of Portugal, Portuguese Economic Journal.

Chari, V., Kehoe, P. J. and McGrattan E. R. (2002). Accounting for the Great Depression. American Economic Review, 92 (2), 22-27.

Chari, V., Kehoe, P. J., and McGrattan, E. R. (2007). Business cycle accounting. Econometrica, 75(3), 781-836.

Chakraborty, S. (2006). Business cycle accounting of the Indian economy. The Indian Economic Journal.

Chakraborty, S., and Otsu, K. (2013). Business cycle accounting of the BRIC economies. The B.E. Journal of Macroeconomics, 13(1), 1-33.

Cho, D., and Doblas-Madrid, A. (2013). Business Cycle Accounting East and West: Asian Finance and the Investment Wedge. Review of Economic Dynamics, 16(4), 724-744.

Cole, H. L. and Ohanian, L. E. (2002). The US and UK Great Depressions through the lens of neoclassical growth theory. American Economic Review, 92(2), 28-32.

del Río, F. and Lores, F. X. (2019). The decline in capital efficiency and labour share. Economica. https://doi.org/10.1111/ecca.12279.

Frisch, R. (1933). Propagation and impulse problems in dynamic economics. Economic essays in honour of Gustav Cassell. London: George Allen & Unwin, 171-205.

Kadiyala, K.R. (1972). Production functions and elasticity of substitution. Southern Economic Journal, 38(3), 281-284.

Kersting, E. K. (2008). The 1980s recession in the UK: A business cycle accounting perspective. Review of Economic Dynamics, 11 (1), 179-191.

Kobayashi, K. and Inaba, M. (2006). Business cycle accounting for the Japanese economy. Japan and The World Economy, 18(4), 418-440. https://doi.org/10.1016/j.japwor.2006.04.003.

Kydland, F. E. and Prescott, E. C. (1982). Time to build and aggregate fluctuations. Econometrica, 50(6), 1345-1370.

McGrattan, E. R. and Prescott, E. C. (2010). Unmeasured investment and the puzzling US boom in the 1990s. American Economic Journal: Macroeconomics, 2(4), 88-123.

Ohanian, L.E. (2010). The economic crisis from a neoclassical perspective. Journal of Economic Perspectives, 24(4), 45-66.

Ohanian, L. and Raffo, A. (2012). Aggregate hours worked in OECD Countries: New measurement and implications for business cycles. Journal of Monetary Economics, 59(1), 40-56.

Otsu, K. (2010). A neoclassical analyses of Asian crisis: business cycle accounting for a small open economy. The B.E. Journal of Macroeconomics, 10(1), 1-39.

Prescott, E. (1998). Needed: A theory of total factor productivity. International Economic Review, 39(3), 525-551.

Slutzky, E. {1937. The Summation of Random Causes as the Source of Cyclic Processes. Econometrica, 5(2), 105-146.

Solow, R. M. (1957). Technical change and the aggregate production function. Review of Economics and Statistics, 39, 312-320.

Sustek, R. (2011). Monetary Business Cycle Accounting, Review of Economic Dynamics, 14(4), 592-612.

Uzawa, H. ( 1961). Neutral inventions and the stability of growth equilibrium. Review of Economic Studies, 28( 2), 117-24.