Learning and Shifts in Long-Run Productivity Growth

FRB of San Francisco Working Paper No. 2004-04

37 Pages Posted: 5 May 2004

See all articles by Rochelle M. Edge

Rochelle M. Edge

Board of Governors of the Federal Reserve System

Thomas Laubach

Board of Governors of the Federal Reserve System (deceased)

John C. Williams

Federal Reserve Bank of New York

Date Written: March 25, 2004

Abstract

Shifts in the long-run rate of productivity growth are difficult, in real time, to distinguish from transitory fluctuations. We analyze the evolution of forecasts of long-run productivity growth during the 1970s and 1990s and examine in a dynamic general equilibrium model the consequences of learning on the responses to shifts in the long-run productivity growth rate. We find that an updating rule based on an estimated Kalman filter model using real-time data describes economists' long-run productivity growth forecasts extremely well. We then show that learning has profound implications for the effects of shifts in trend productivity growth and can improve the model's ability to generate responses that resemble historical experience. If immediately recognized, an increase in the long-run growth rate produces a sharp decline in employment and investment, while with learning, a rise in the long-run rate of productivity growth sets off a sustained boom in employment and investment.

Keywords: DGE models, Kalman-filter, Real-time data, Learning, Productivity growth

JEL Classification: E13, E32, D83, O40

Suggested Citation

Edge, Rochelle M. and Laubach, Thomas and Williams, John C., Learning and Shifts in Long-Run Productivity Growth (March 25, 2004). FRB of San Francisco Working Paper No. 2004-04, Available at SSRN: https://ssrn.com/abstract=530745 or http://dx.doi.org/10.2139/ssrn.530745

Rochelle M. Edge

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
(202) 452 2339 (Phone)
(202) 736-5638 (Fax)

Thomas Laubach

Board of Governors of the Federal Reserve System (deceased)

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2715 (Phone)
202-452-3819 (Fax)

John C. Williams (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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