CIRJE-F-396 | "The Adjusted Solow Residual and Asset Returns" |
Author Name | Lee, Jeong-Joon |
Date | January 2006 |
Full Paper | PDF file@ |
Remarks | Subsequently published in Eastern Economic Journal, 2007, 33,(2), pp. 231-255. |
Abstract |
The purpose of this study is to examine the effects of a measured aggregate
productivity shock on asset returns. To achieve this, a simple
equilibrium business cycle model is presented to show that an aggregate
productivity shock can be identified as a factor affecting asset returns.
The paper uses the Solow residual to measure productivity changes, but
deviates from standard practice by incorporating variations in capital utilization
rates. The paper first develops the theoretical link between productivity
shocks and asset returns with no adjustment costs, and then
tests that link with the two measures of productivity, the Solow residual
with and without variation in capital utilization. Results based on U.S
post-war data show significant differences in the dynamic impacts of these
two measures of productivity. The VAR evidence suggests that technology
changes, measured with variation in capital utilization, have a delayed
impact on asset returns, a distinct finding. Finally, policy implications of
the findings are discussed.
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