Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212455 
Year of Publication: 
2019
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 21/2019
Publisher: 
Bank of Finland, Helsinki
Abstract: 
This paper analyses the procyclicality of euro area total factor productivity and its role in business cycle amplification by estimating a medium-scale DSGE model with endogenous productivity mechanism on euro area data. Total factor productivity evolves endogenously as a consequence of costly investment in R&D and adoption of new technologies. We find that the endogeneity of TFP induces a high degree of persistence in the euro area business cycle via a feedback mechanism between overall economic conditions and investment in productivity-enhancing technologies. As to the sources of the euro area productivity slowdown, we conclude that a decrease in the efficiency of R&D investment is among the key factors generating the pre-crisis productivity slowdown, while starting from the Great Recession an increase in liquidity demand is identified as the most important driving force. The endogenous technology mechanism further exerts a dampening effect on the inflation response over the business cycle which helps rationalizing both the negligible fall in inflation during the Great Recession and the sluggish increase of inflation in the subsequent recovery.
JEL: 
E24
E32
O31
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-296-9
Document Type: 
Working Paper

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