Tracking the New Economy: Using Growth Theory to Detect Changes in Trend Productivity

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Staff Reports

Tracking the New Economy: Using Growth Theory to Detect Changes in Trend Productivity

January 2003 Number 159

JEL classification: O4, O51, C32

Authors: James A. Kahn and Robert Rich

The acceleration of productivity since 1995 has prompted a debate over whether the economy's underlying growth rate will remain high. In this paper, we propose a methodology for estimating trend growth that draws on growth theory to identify variables other than productivity—namely consumption and labor compensation—to help estimate trend productivity growth. We treat that trend as a common factor with two "regimes" high-growth and low-growth. Our analysis picks up striking evidence of a switch in the mid-1990s to a higher long-term growth regime, as well as a switch in the early 1970s in the other direction. In addition, we find that productivity data alone provide insufficient evidence of regime changes; corroborating evidence from other data is crucial in identifying changes in trend growth. We also argue that our methodology would be effective in detecting changes in trend in real time: In the case of the 1990s, the methodology would have detected the regime switch within two years of its actual occurrence according to subsequent data.

Available only in PDF PDF

45 pages / 786 kb

For a published version of this report, see James A. Kahn and Robert Rich, "Tracking the New Economy: Using Growth Theory to Detect Changes in Trend Productivity," Journal of Monetary Economics 54, no. 6 (September 2007): 1670-701.

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