The Pre-Great Recession Slowdown in Productivity

Abstract

In the years since the Great Recession, many observers have highlighted the slow pace of productivity growth around the world. For the United States and Europe, we highlight that this slow pace began prior to the Great Recession. The timing thus suggests that it is important to consider factors other than just the deep crisis itself or policy changes since the crisis. For the United States, at the frontier of knowledge, there was a burst of innovation and reallocation related to the production and use of information technology in the second half of the 1990s and the early 2000s. That burst ran its course prior to the Great Recession. Continental European economies were falling back relative to that frontier at varying rates since the mid-1990s. We provide VAR and panel-data evidence that changes in real interest rates have influenced productivity dynamics in this period. In particular, the sharp decline in real interest rates that took place in Italy and Spain seem to have triggered unfavorable resource reallocations that were large enough to reduce the level of total factor productivity, consistent with recent theories and firm-level evidence.Keywords: Productivity Growth; Great Recession; Misallocation; Convergence JEL Codes: D24, E23, E44, F45, O47Please address correspondence to fernaldjg@gmail.com. We thank Fabio Canova, Robert Inklaar, Robert Kolmann, Eric Leeper, Werner Roeger, and seminar participants at several institutions for helpful comments. We also thank Genevieve Denoeux, Andrew Tai and Bing Wang for helpful research assistance. John Fernald thanks the Einaudi Institute for Economics and Finance for hosting him while writing much of the paper. The views in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of San Francisco, the Banque de France, or anyone else associated with those institutions.Since the Great Recession began in 2007, productivity growth in advanced economies has continually surprised to the downside. 1 A severe downturn and slow recovery could affect productivity through various channels, both cyclical and structural. But, as we emphasize, the slowdown in advanced-economy total factor productivity (TFP) growth was broadly underway prior to the crisis. 2 The pre-Great Recession timing suggests the importance of factors other than just the deep crisis (or ensuing policy changes) itself.To understand the evolution of advanced-economy TFP growth prior to the crisis, we highlight three broad factors that have shaped the global economy in recent decades: Technical change, structural rigidities, and declining real interest rates and abundant credit. Each factor has attracted analysis and attention but they have not, typically, been considered together. For expositional clarity as well as data availability, we focus on a small number of major advanced economies: the U.S. and the four main Euro Area countries (Germany, France, Italy, and Spain).For the United States, which we assume is at the frontier of knowledge, we highligh...

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