Solow Residuals Without Capital Stocks

Michael C. Burda, Battista Severgnini

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

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.
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.
LanguageEnglish
JournalJournal of Development Economics
Volume109
Pages154–171
ISSN0304-3878
DOIs
StatePublished - Jul 2014

Keywords

    Cite this

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

    In: Journal of Development Economics, Vol. 109, 07.2014, p. 154–171.

    Research output: Contribution to journalJournal articleResearchpeer-review

    TY - JOUR

    T1 - Solow Residuals Without Capital Stocks

    AU - Burda,Michael C.

    AU - Severgnini,Battista

    PY - 2014/7

    Y1 - 2014/7

    N2 - 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.

    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

    KW - Solow residual

    KW - Measurement error

    KW - Malmquist index

    U2 - 10.1016/j.jdeveco.2014.03.007

    DO - 10.1016/j.jdeveco.2014.03.007

    M3 - Journal article

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    JO - Journal of Development Economics

    T2 - Journal of Development Economics

    JF - Journal of Development Economics

    SN - 0304-3878

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