Total Factor Productivity: An Unobserved Components Approach

Abstract

This work examines the presence of unobserved components in the time series of Total Factor Productivity, which is an idea central to modern Macroeconomics. The main approaches in both the study of economic growth and the study of business cycles rely on certain properties of the different components of the time series of Total Factor Productivity. In the study of economic growth, the Neoclassical growth model explains growth in terms of technical progress as measured by the secular component of Total Factor Productivity. While in the study of business cycles, the Real Business Cycle approach explains short-run fluctuations in the economy as determined by temporary movements in the production function, which are reflected by the cyclical component of the time series of the same variable. The econometric methodology employed in the estimation of these different components is the structural time series approach developed by Harvey (1989), Harvey and Shephard (1993), and others. An application to the time series of Total Factor Productivity for the 1948-2002 U.S. private non-farm business sector is presented.