Demand and innovation in productivity growth

The labour productivity impact of demand and innovation is investigated in this paper combining insights from the Kaldorian and Schumpeterian traditions. After a review of studies in such traditions, a general model is proposed for explaining productivity growth in European manufacturing and service industries in the late 1990s, followed by two distinct specifications for the industries oriented toward product innovation, and for those where process innovation dominates. The empirical analysis is based on the match of the SIEPI‐CIS2 database developed at the University of Urbino and Eurostat Input–Output Tables at the industry level, for 22 manufacturing sectors and 10 services sectors. Six European countries are considered: Germany, France, Italy, the Netherlands, Portugal and the United Kingdom. The results show that productivity growth in European industries can be explained by a combination of technology factors and demand dynamics, confirming the complementarity of technology and demand effects. On the demand side, household consumption emerges as the most pervasive component of demand, able to stimulate greater efficiency in all manufacturing and service industries. Investment also has a role, focused however on the capital goods producing industries. On the technology side, the mechanisms of productivity growth are fundamentally different in the industries oriented towards product innovation and in those dominated by process innovation. This evidence supports the view that innovation in firms and industries can be associated to two contrasting strategies, searching either for technological competitiveness, through knowledge generation, product innovation and expansion of new markets, or aiming at greater cost competitiveness, through job reductions, labour saving investment, flexibility and restructuring.     

Demand shocks and economic fluctuations

This paper studies conditions under which demand-side shocks can generate realistic business cycles in RBC models. Although highly persistent demand shocks are necessary for generating procyclical investment, variable capacity utilization and habit formation can reduce the required degree of persistence.     

Product market competition and productivity shocks

I investigate the interaction effects of competition and productivity shocks on stocks’ earnings and returns. I find that the sensitivities of earnings and returns to productivity shocks are negatively associated with competition intensity. I also find that the excess returns of productivity shocks-sorted portfolios are lower when competition intensity is high, even after controlling for known return predictors. Overall, the empirical evidence shows firms are less exposed to productivity shocks when competition is high. As such, this study provides a possible mechanism through which the structure of product markets affects stock returns.     

Demand shocks,supply shocks and the cyclicality of real wages

The behaviour of real wages over the business cycle has received increasiing attention in recent years. The cyclicality of real wages constitues an important aspect of recent models of the business cycle. However,empirical studies undertaken to determine whether real wages are procyclical or countercyclical have reported conflicting findings. In thiis paper we use vector-autoregressions to analyse the cyclicality of real wages. We find that the source of the disturbance plays a decisive role in the cyclical behaviour of real wages. In particular, we demonstrate that a supply shock generates procyclical real wages,whereas a demand shock yields countercyclicality.     

Are shocks to the terms of trade shocks to productivity?

International trade is frequently thought of as a production technology in which the inputs are exports and the outputs are imports. Exports are transformed into imports at the rate of the price of exports relative to the price of imports: the reciprocal of the terms of trade. Cast this way, a change in the terms of trade acts as a productivity shock. Or does it? In this paper, we show that this line of reasoning cannot work in standard models. Starting with a simple model and then generalizing, we show that changes in the terms of trade have no first-order effect on productivity when output is measured as chain-weighted real GDP. The terms of trade do affect real income and consumption in a country, and we show how measures of real income change with the terms of trade at business cycle frequencies and during financial crises.     

Business cycle, unemployment benefits and productivity shocks

The dimension of aggregate fluctuations is quite different between the European and US economies. Such a result fully justifies attention to non-Walrasian features for improving the empirical performance of the RBC model. In this paper, we introduce two features, present in European economies, into the standard general setting of the infinite-horizon stochastic growth paradigm: trade union behavior and unemployment benefits. We show that this non-Walrasian economy (i) improves the ability to account for the stylized facts, (ii) displays realistic features in explaining the employment and productivity puzzles, (iii) may account for contractions.     

Sector-specific productivity shocks in a matching model

Endogenous separation matching models have the shortcoming that they are barely able to replicate the Beveridge curve (i.e. the negative correlation between unemployment and vacancies) and business cycle statistics jointly. This paper builds upon the sectoral shock literature and combines its insights with the standard endogenous separation matching approach. We show that the endogenous matching model with sectoral shocks can generate an aggregate Beveridge curve and performs reasonably well in explaining business cycle facts, especially compared to the one-sector baseline model.     

Demand shocks and firm-financed R&D expenditures

Business cycles might affect firms'?ability and incentive to perform R&;D. Firms finance most R&;D activities out of cash flow so when cash flow decreases the funds available for R&;D also decreases. This limits the ability of firms to perform R&;D, potentially leading to reduced R&;D expenditures during recessions. However, business cycles also influence the incentive to perform R&;D. The opportunity cost of funds devoted to R&;D falls during recessions since the return on production will likely be lower than during an expansion. During recessions, this provides firms with an incentive to redistribute an existing pool of funds away from production and towards R&;D projects. This paper tests whether the business cycle influences the incentive and ability of firms to engage in R&;D activities, in particular examining whether the response is symmetric across the business cycle.     

Demand and supply effects of bargaining power shocks

In times of crisis, social partners may consider a temporary decline in wages as a necessity to maintain employment. This paper studies the opposing demand and supply effects following declining bargaining power of workers in a New-Keynesian model with search and matching in the labour market. Lower labour income reduces aggregate demand in the presence of credit-constrained consumers. The main result is that falling bargaining power contracts output notably when monetary policy is constrained by the zero lower bound or when agents' expectations about the persistence of the shock adjust slowly.     

Heterogeneous productivity shocks,elasticity of substitution and aggregate fluctuations

We use a Dixit-Stiglitz setting to show that aggregate productivity fluctuations can be generated through changes in the dispersion of firms’ productivity. When the elasticity of substitution among goods is larger than one, an increase in the dispersion raises aggregate productivity because firms at the top of the distribution produce most of output. When the elasticity is smaller than one, an increase in the dispersion reduces aggregate productivity because firms at the bottom of the distribution use most of inputs. We use individual firm level data from Spanish manufacturing firms to test the relationship between the dispersion of firms’ productivity and aggregate productivity. The estimated coefficients are consistent with the predictions of the model: we find that an increase in the coefficient of variation of firms productivity of 1% increases aggregate productivity by 0.16% in sectors with an elasticity of substitution larger than one while the same increase in the standard deviation reduces aggregate productivity by 0.36% in sectors with an elasticity of substitution smaller than one.     

NAIRU and productivity shocks: evidence from three gigantic economies

This article investigates NAIRU which stands for Non Accelerating Inflation Rate of Unemployment and its trend in three of the world gigantic economies to mention orderly USA, Japan and China. A Vector Autoregressive Regression model estimated to study the reaction of NAIRU to shocks imposed by labour productivity. Results indicate both productivity shocks and NAIRU fluctuations have counter effects.     

Aggregate demand shocks and economic growth

The traditional view of growth and fluctuations implies that aggregate demand shocks result in only transitory departures from trend or “normal” output, which is determined exclusively by aggregate supply factors. Using a simple dynamic framework for a less-developed economy, a series of models is developed to show that aggregate demand can have a permanent effect on economic growth. It is shown that even if the economy converges to some “normal” path, this path itself may be altered by large demand shocks, due to increasing returns and hysteresis effects in labor markets and balance of payments constraints. It is also shown that the economy may not converge to its “normal” path, in which case fiscal and monetary policy will have long-term effects on output and growth.     

Monetary policy shocks and productivity measures in the G-7 countries

An implication of two-country international real business cycle models is that total factor productivity should be an exogenous stochastic process. Economic theories which feature labor hoarding, variable capacity utilization, and increasing returns predict that measured productivity shifts are not exogenous; instead, expansionary aggregate demand shocks should lead to an increase in measured productivity. For each of the G-7 countries, this paper measures quarterly aggregate total factor productivity for the domestic country and its rest-of-world (G-6) counterpart. In each case the domestic productivity measures are not strictly exogenous: expansionary U.S. monetary policy shocks, as well as other G-6 monetary policy shocks, lead to productivity expansions. The evidence indicates that international business cycle models are misspecified unless they feature endogenous productivity mechanisms.Received: June 2001, Accepted: December 2001, JEL Classification: E5, F4Correspondence to: Charles L. EvansFor their helpful comments, we thank Mario Crucini, Patricia Reynolds, and Steve Strongin. The views expressed in this paper do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.     

Stochastic growth with correlated production shocks

This paper extends the stochastic growth model of Brock and Mirman [J. Econ. Theory4 (1972), 497–513] to allow the production shocks to be correlated over time. The resultant optimal savings and consumption policies depend not only upon the current level of output but also upon the most recent realization of the random shock. The properties of these policy functions are studied and it is shown that the Markov process on output, capital stock and consumption resulting from the application of these policies converges to a stationary distribution.     

Government interventions and productivity growth

This article investigates the impact of government industrial policy and trade protection of the manufacturing sector in Korea. Empirical results are provided, using four-period panel data for the years 1963 through 1983, for thirty-eight Korean industries in which trade protection reduced growth rates of labor productivity and total factor productivity, while industrial policies, such as tax incentives and subsidized credit, were not correlated with total factor productivity growth in the promoted sectors. The evidence thus implies that less government intervention in trade is linked to higher productivity growth.     

Firms' internationalization and productivity growth

From a theoretical perspective it is well stated that firms involved in international markets should exhibit higher productivity levels. There is also empirical evidence that supports this result. This paper extends this relationship to a dynamic perspective. It provides evidence on how productivity evolves in more internationalized firms distinguishing different degrees of international involvement both in qualitative as well as in quantitative terms. The results show that productivity evolves differently in those firms that are doing international business, although without differences between large exporters and multinationals.     

Endogenous growth, monetary shocks and nominal rigidities

We introduce endogenous growth in a standard NK model with staggered prices and wages. We find that the source of nominal rigidities, the shock persistence and the type of Taylor rule affect the relationship between monetary volatility and growth.     

Oil income shocks and economic growth in Iran

The aim of this paper is to study the relationship between oil revenue shocks and output growth in Iran by Adopting an SVAR model over the period 1959–2008. The results indicate that positive and negative oil revenue shocks significantly affect output growth positively and negatively respectively and these effects are asymmetric. While negative oil revenue shocks adversely affect the economic growth, the resource curse impedes the expected positive effects of positive oil shocks. In order to overcome the harmful effects of oil booms and busts, the establishment of oil stabilization and saving funds, diversifying economy, delinking government expenditure from oil revenues and introducing fiscal rules into the budget seems crucial for Iran economy.     

Stochastic growth with short-run prediction of shocks

We study a variation of the one-sector stochastic optimal growth model with independent and identically distributed shocks where agents acquire information that enables them to accurately predict the next period??s productivity shock (but not shocks in later periods). Optimal policy depends on the forthcoming shock. A ??better?? predicted realization of the shock that increases both marginal and total product always increases next period??s optimal output. We derive conditions on the degree of relative risk aversion and the elasticity of marginal product under which optimal investment increases or decreases with a better shock. Under fairly regular restrictions, optimal outputs converge in distribution to a unique invariant distribution whose support is bounded away from zero. We derive explicit solutions to the optimal policy for three well-known families of production and utility functions and use these to show that volatility of output, sensitivity of output to shocks, and expected total investment may be higher or lower than in the standard model where no new information is acquired over time; the limiting steady state may also differ significantly from that in the standard model.