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Title:Solow residuals without capital stocks PDF Logo
Authors:Burda, Michael C.
Severgnini, Battista
Issue Date:2008
Series/Report no.:SFB 649 discussion paper 2008,040
Abstract:For more than fifty years, the Solow decomposition (Solow 1957) has served as the standard measurement of total factor productivity (TFP) growth in economics and management, yet little is known about its precision, especially when the capital stock is poorly measured. Using synthetic data generated from a prototypical stochastic growth model, we explore the quantitative extent of capital measurement error when the initial condition is unknown to the analyst and when capacity utilization and depreciation are endogenous. We propose two alternative measurements which eliminate capital stocks from the decomposition and significantly outperform the conventional Solow residual, reducing the root mean squared error in simulated data by as much as two-thirds. This improvement is inversely related to the sample size as well as proximity to the steady state. As an application, we compute and compare TFP growth estimates using data from the new and old German federal states.
Subjects:Total factor productivity
Solow esidual
generalized differences
measurement error
Malmquist index
JEL:D24
E01
E22
O33
O47
Document Type:Working Paper
Appears in Collections:SFB 649 Discussion Papers, HU Berlin

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