Solow residuals without capital stocks

Abstract

For more than fifty years, the Solow decomposition (Solow 1957) has served as the standard measurement of total factor productivity (TFP) growth in economics and management, yet little is known about its precision, especially when the capital stock is poorly measured. Using synthetic data generated from a prototypical stochastic growth model, we explore the quantitative extent of capital measurement error when the initial condition is unknown to the analyst and when capacity utilization and depreciation are endogenous. We propose two alternative measurements which eliminate capital stocks from the decomposition and significantly outperform the conventional Solow residual, reducing the root mean squared error in simulated data by as much as two-thirds. This improvement is inversely related to the sample size as well as proximity to the steady state. As an application, we compute and compare TFP growth estimates using data from the new and old German federal states.

Energy-Extended CES Aggregate Production: Current Aspects of Their Specification and Econometric Estimation

“…Interestingly, empirical studies involving only capital and labour expend significant effort to quality adjust at least one variable [57,85,108,150], but those introducing energy as a third variable typically use unadjusted values for capital and labour [1,25,79,151]. This seems surprising, but perhaps reflects the significant effort required to develop or obtain time-series of quality-adjusted variables.…”

Impact of the transition on the total factor productivity in Croatia

“…Burda and Severgnini (2009) stress that plausible official estimates of sectoral and even aggregate capital stock are absent in transition countries which in turn enables wide divergences in the capital stock estimates and leads to wide divergences in TFP level and growth estimates. This is why numerous researchers have chosen to measure TFP (on sectoral or aggregate level) without the use of capital stock data (e.g.…”

Measuring TFP: Growth accounting for the real sector of the economy in the Republic of Srpska

“…Data on capital are not published by official statistics and it requires additional calculation. The most commonly used method for capital assessment is the so-called "perpetual inventory method" (PIM), which can be described briefly with the equation: (Burda & Severgnini, 2008):…”

“…The current capital stock is the weighted sum of an initial capital value, K 0 , and intervening investment expenditures, with weights corresponding to their undepreciated components (Burda, et al, 2008). Four general problems arise from using capital stock data estimated by statistical agencies.…”

“…The RS is a country in transition and there is a limitation of the data that were analyzed. The US Bureau of Economic Analysis (BEA) assumes that investment in the initial period I 0 , represents the steady state in which expenditures grow at rate g and are depreciated at rate δ, so a natural estimate of K 0 is given by (Burda, et al, 2008):…”