- 7 May 2020
- WORKING PAPER SERIES - No. 2401Details
- This paper analyses the endogeneity 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. In this framework, 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 a shock to liquidity demand is identified as the most important driving force. The endogenous technology mechanism further exerts a dampening effect on the inflation response following a recessionary shock and hence has important implications for both the negligible fall in inflation during the Great Recession, as well as the sluggish increase of inflation in the subsequent recovery.
- JEL Code
- E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
O31 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→Innovation and Invention: Processes and Incentives