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.

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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.