Endogenous TFP, business cycle persistence and the productivity slowdown

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Title: Endogenous TFP, business cycle persistence and the productivity slowdown
Author: Schmöller, Michaela ; Spitzer, Martin
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 21/2019
Year of publication: 2019
Publication date: 18.9.2019
Published in: Published also in European Central Bank Working Paper Series 2401/2020 https://www.ecb.europa.eu/pub/research/working-papers/html/index.en.html
Pages: 39
Subject (yso): euroalue; tuottavuus; talouskasvu; inflaatio; suhdannevaihtelut; teknologia; tutkimus- ja kehittämistoiminta
Keywords: R&D; tuottavuuskasvun hidastuminen
JEL: E24; E32; O31
Other keywords: Endogenous Productivity; Euro Area Business Cycles; Weak Growth; Low Inflation
Abstract: This paper analyses the procyclicality of euro area total factor productivity and its role in business cycle amplification by estimating a medium-scale DSGE model with endogenous productivity mechanism on euro area data. Total factor productivity evolves endogenously as a consequence of costly investment in R&D and adoption of new technologies. We find that the endogeneity of TFP induces a high degree of persistence in the euro area business cycle via a feedback mechanism between overall economic conditions and investment in productivity-enhancing technologies. As to the sources of the euro area productivity slowdown, we conclude that a decrease in the efficiency of R&D investment is among the key factors generating the pre-crisis productivity slowdown, while starting from the Great Recession an increase in liquidity demand is identified as the most important driving force. The endogenous technology mechanism further exerts a dampening effect on the inflation response over the business cycle which helps rationalizing both the negligible fall in inflation during the Great Recession and the sluggish increase of inflation in the subsequent recovery.
Rights: https://helda.helsinki.fi/bof/copyright

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