THE SOLOW RESIDUAL FOR AUSTRALIA: TECHNOLOGY SHOCKS OR FACTOR UTILIZATION?

Authors

  • Glenn Otto

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    • *I would like to thank Mardi Dungey, Don Harding, Graham Voss, the participants at the 1996 Macroeconomics Workshop (University of Melbourne) and two referees for their helpful comments. Financial support from the Australian Research Council is gratefully acknowledged.


1 Senior Lecturer, School of Economics, University of New South Wales, Sydney, Phone 61-2-9385-3313 Fax 61-2-9313-6337, E-mail g.otto@unsw.edu.au

Abstract

This paper presents evidence which implies that fluctuations in the Solow residual for Australia do not solely reflect technology shocks. Recent work suggests that the Solow residual is a noisy measure of technology shocks. One source of noise in the standard measure of the Solow residual is changes in factor utilization. In this paper a structural vector autoregression model for capacity utilization and the Solow residual is estimated. A transitory shock is identified that accounts, for about 30% of the short term variation in the Solow residual and virtually 100% of the variation in capacity utilization at all horizons. (JEL E3, E32, O4)

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