VARIANCE PROPERTIES OF SOLOWS PRODUCTIVITY RESIDUAL AND THEIR CYCLICAL IMPLICATIONS

For the United States economy (1960-1989), the correlation between the growth rates of the Solow residual and the real price of energy (government spending) is -0.55 (0.09). This study develops a model to see if it quantitatively captures the endogenous transmission mechanism underlying the observed Solow residual correlations. It does. The transmission mechanism depends on endogenous capital utilization. Incorporating shocks to 'true' technology, energy prices, and government spending, the model economy accounts for 76 or 89 percent of U.S. output volatility and is generally consistent with features of U.S, business cycles.