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Total Factor Productivity and the Propagation of Shocks; Empirical Evidence and Implications for the Business Cycle

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  • Eric Mayer
  • Sebastian Rüth
  • Johann Scharler

Abstract

Using a sign restrictions approach, we document that total factor productivity (TFP) moves counter-cyclically in the aftermath of supply and demand side shocks. To interpret our empirical results, we conduct counter-factual simulations, based on a New Keynesian DSGE model in which TFP fluctuates endogenously due to time-varying labor effort. The simulations show that the decline in the output gap, following an adverse shock, is dampened by the endogenously improving TFP as long as the nominal interest rate remains strictly positive during the downturn. If the economy hits the zero lower bound, the decline in the output gap is amplified when TFP improves endogenously.

Suggested Citation

  • Eric Mayer & Sebastian Rüth & Johann Scharler, 2014. "Total Factor Productivity and the Propagation of Shocks; Empirical Evidence and Implications for the Business Cycle," Working Papers 2014-25, Faculty of Economics and Statistics, Universität Innsbruck.
    • Handle: RePEc:inn:wpaper:2014-25
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    Cited by:

    1. Teresiński, Jan, 2019. "Total factor productivity and the terms of trade," IWH-CompNet Discussion Papers 6/2019, Halle Institute for Economic Research (IWH).

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    More about this item

    Keywords

    TFP; labor effort; zero lower bound;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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