Why is productivity procyclical? Why do we care?

Productivity rises in booms and falls in recessions. There are four main explanations for this procyclical productivity: (i) procyclical technology shocks, (ii) widespread imperfect competition and increasing returns, (iii) variable utilization of inputs over the cycle, and (iv) resource reallocations. Recent macroeconomic literature views this stylized fact of procyclical productivity as an essential feature of business cycles because each explanation has important implications for macroeconomic modeling. In this paper, we discuss empirical methods for assessing the importance of these four explanations. We provide microfoundations for our preferred approach of estimating an explicitly first-order approximation to the production function, using a theoretically motivated proxy for utilization. When we implement this approach, we find that variable utilization and resource reallocations are particularly important in explaining procyclical productivity. We also argue that the reallocation effects that we identify are not "biases" -- they reflect changes in an economy’s ability to produce goods and services for final consumption from given primary inputs of capital and labor. Thus, from a normative viewpoint, reallocations are significant for welfare; from a positive viewpoint, they constitute potentially important amplification and propagation mechanisms for macroeconomic modeling.Productivity ; Business cycles

A Theory of the Reform of Bureaucratic Institutions

By bureaucratic institutions or bureaucracy, we mean the rules and regulations that are implemented by government agencies. Burdensome bureaucratic institutions are leading obstacles to economic development and therefore the target of economic reform of many countries in today's world. In this paper, we provide a theoretical framework to analyze the reform of bureaucratic institutions. The analysis shows the key to the reform is to properly incentivize the incumbent generation of bureaucrats, whose cooperation is needed to reform the bureaucracy. However, a simple buy out strategy of reform may not always work. Under certain conditions, a delegation strategy that grants incumbent bureaucrats the decision rights to initiate and to reap the benefit of reform can be successful.

What do we know and not know about potential output?

Potential output is an important concept in economics. Policymakers often use a one-sector neoclassical model to think about long-run growth, and often assume that potential output is a smooth series in the short run--approximated by a medium- or long-run estimate. But in both the short and long run, the one-sector model falls short empirically, reflecting the importance of rapid technical change in producing investment goods; and few, if any, modern macroeconomic models would imply that, at business cycle frequencies, potential output is a smooth series. Discussing these points allows us to discuss a range of other issues that are less well understood, and where further research could be valuable.Input-output analysis ; Productivity ; Monetary policy

What do we know (and not know) about potential output?

Potential output is an important concept in economics. Policymakers often use a one-sector neoclassical model to think about long-run growth, and they often assume that potential output is a smooth series in the short run -- approximated by a medium- or long-run estimate. But in both the short and the long run, the one-sector model falls short empirically, reflecting the importance of rapid technological change in producing investment goods; and few, if any, modern macroeconomic models would imply that, at business cycle frequencies, potential output is a smooth series. Discussing these points allows the authors to discuss a range of other issues that are less well understood and where further research could be valuable.Economic development ; Economic conditions

Aggregate Productivity and the Productivity of Aggregates

Explanations of procyclical productivity play a key role in a variety of business-cycle models. Most of these models, however, explain this procyclicality within a representative-firm paradigm. This procedure is misleading. We decompose aggregate productivity changes into several terms, each of which has an economic interpretation. However, many of these terms measure composition effects such as reallocations of inputs across productive units. We apply this decomposition to U.S. data by aggregating from roughly the two-digit level to the private economy. We find that the compositional terms are significantly procyclical. Controlling for these terms virtually eliminates the evidence for increasing returns to scale, and implies that input growth is uncorrelated with technology change.

Business Cycles in International Historical Perspective

This paper examines business cycles theoretically and empirically, with a quantitative study based on experience over the long run and in a cross section of countries. Several major questions in business cycle theory are explored. Theoretical concerns indicate that the properties of business cycle models depend not only on important structural aspects of the model such as money neutrality, labor market structure, and price adjustment, but also on the closure of the model in international markets. Econometric considerations suggest that more information about the country-specific versus universal features of cycles could be gleaned from the study of panel data. A review of business cycle properties in a sample of over a dozen countries is considered in light of these issues.

Estimating the Cyclicality of Marginal Costs Directly

This paper studies the cyclical behavior of marginal costs by examining changes in a constructed measure of total costs in response to changes in output. The main result is that marginal costs in U.S. manufacturing appear close to constant at annual frequency. this conclusion contrasts with previous work that has found marginal costs to be strongly procyclical. the finding of non-increasing marginal cost is robust to considerations of various types of bias, and issues of cyclical measurement error. The methodology of the paper is shown to be valid under different assumptions about economic behaviour such as labor hoarding, increasing marginal prices of inputs, and the existence of fixed costs of production. The results do not support the hypothesis that marginal costs are constant over the business cycle because of large productive spillovers in manufacturing that are external at the two-digit level.Center for Research on Economic and Social Theory, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/100976/1/ECON041.pd

Intermediate Goods and Business Cycles: Implications for Productivity and Welfare

This paper studies a business-cycle model with imperfect competition where intermediate goods are used in production. It is an example of a class of models in which markups are countercyclical. One major result is that in this setting, demand-driven output movements cause productivity to be procyclical. The paper studies a number of theoretical and empirical implications of this source of productivity fluctuations. In a subset of models, countercyclical markups result from assuming that there are fixed costs of changing nominal prices. The paper shows that modeling the use of intermediate goods in this type of model greatly expands the extent of price rigidity, leading to larger welfare losses from business cycles.Center for Research on Economic and Social Theory, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/100987/1/ECON042.pd

Procyclical Productivity: Overhead Inputs or Cyclical Utilization?

It has long been argued that cyclical fluctuations in labor and capital utilization and overhead labor and capital are important for explaining procyclical productivity. Her I present two simple and direct tests of these hypotheses, and a way of measuring the relative importance of these two explanations. The intuition behind the paper is that materials input is likely to be measured with less cyclical error than labor and capital input, and materials are likely to be used in strict proportion to value added. In that case, materials growth provides a good measure of the unobserved changes in capital and labor input. I find that labor hoarding and cyclical capital utilization are quanititatively significant: the true growth of variable labor and capital inputs is, on average, almost twice the measured change in the capital stock or labor hours. More than half of that is caused by the presence of overhead inputs in production; the rest is due to cyclical factor utilization.Center for Research on Economic and Social Theory, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/100998/1/ECON043.pd