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Monetary policy shocks and productivity measures in the G-7 countries

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  • Charles L. Evans
  • Fernando Santos

Abstract

. An implication of two-country international real business cycle models is that total factor productivity should be an exogenous stochastic process. Economic theories which feature labor hoarding, variable capacity utilization, and increasing returns predict that measured productivity shifts are not exogenous; instead, expansionary aggregate demand shocks should lead to an increase in measured productivity. For each of the G-7 countries, this paper measures quarterly aggregate total factor productivity for the domestic country and its rest-of-world (G-6) counterpart. In each case the domestic productivity measures are not strictly exogenous: expansionary U.S. monetary policy shocks, as well as other G-6 monetary policy shocks, lead to productivity expansions. The evidence indicates that international business cycle models are misspecified unless they feature endogenous productivity mechanisms.
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Suggested Citation

  • Charles L. Evans & Fernando Santos, 1993. "Monetary policy shocks and productivity measures in the G-7 countries," Working Paper Series, Macroeconomic Issues 93-12, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhma:93-12
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    Cited by:

    1. Bianchi, Francesco & Kung, Howard & Morales, Gonzalo, 2019. "Growth, slowdowns, and recoveries," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 47-63.
    2. Ben Fung & Rohit Gupta, "undated". "Searching for the Liquidity Effect in Canada," Staff Working Papers 94-12, Bank of Canada.
    3. David R. Baqaee & Emmanuel Farhi & Kunal Sangani, 2024. "The Supply-Side Effects of Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 132(4), pages 1065-1112.
    4. Alain Paquet & Benoit Robidoux, 1997. "Issues on the Measurement of the Solow Residual and the Testing of its Exogeneity: a Tale of Two Countries," Cahiers de recherche CREFE / CREFE Working Papers 51, CREFE, Université du Québec à Montréal.
    5. Benjamin M. Friedman, 1995. "Does Monetary Policy Affect Real Economic Activity?: Why Do We Still Ask This Question?," NBER Working Papers 5212, National Bureau of Economic Research, Inc.

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