Solow Residuals Without Capital Stocks

Michael C. Burda, Battista Severgnini

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review

Resumé

We use synthetic data generated by a prototypical stochastic growth model to assess the accuracy of the Solow residual (Solow, 1957) as a measure of total factor productivity (TFP) growth when the capital stock in use is measured with error. We propose two alternative measurements based on current investment expenditures: one eliminates the capital stock by direct substitution, while the other employs generalized differences of detrended data and the Malmquist index. In short samples, these measures can exhibit consistently lower root mean squared errors than the Solow–Törnqvist counterpart. Capital measurement problems are particularly severe for economies still far from their steady state. This drawback of the Solow residual is thus most acute in applications in which its accuracy is most highly valued. As an application, we compute and compare TFP growth measures for developing countries in the Heston–Summers dataset.
OriginalsprogEngelsk
TidsskriftJournal of Development Economics
Vol/bind109
Sider (fra-til)154–171
ISSN0304-3878
DOI
StatusUdgivet - jul. 2014

Emneord

  • Total factor productivity
  • Solow residual
  • Measurement error
  • Malmquist index

Citer dette

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Solow Residuals Without Capital Stocks. / Burda, Michael C.; Severgnini, Battista.

I: Journal of Development Economics, Bind 109, 07.2014, s. 154–171.

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review

TY - JOUR

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AU - Severgnini, Battista

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AB - We use synthetic data generated by a prototypical stochastic growth model to assess the accuracy of the Solow residual (Solow, 1957) as a measure of total factor productivity (TFP) growth when the capital stock in use is measured with error. We propose two alternative measurements based on current investment expenditures: one eliminates the capital stock by direct substitution, while the other employs generalized differences of detrended data and the Malmquist index. In short samples, these measures can exhibit consistently lower root mean squared errors than the Solow–Törnqvist counterpart. Capital measurement problems are particularly severe for economies still far from their steady state. This drawback of the Solow residual is thus most acute in applications in which its accuracy is most highly valued. As an application, we compute and compare TFP growth measures for developing countries in the Heston–Summers dataset.

KW - Total factor productivity

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