Discussion Paper Series 2004-E-5

What Do the Purified Solow Residuals Tell Us about Japan's Lost Decade?

Takuji Kawamoto

In the 1990s, measured productivity growth has decelerated dramatically in Japan. However, the standard Solow residuals may reflect factors other than changes in the rate of technological progress. This paper attempts to construct a measure of "true" aggregate technical change for the Japanese economy over the years 1973-1998, controlling for increasing returns, imperfect competition, cyclical utilization of capital and labor, and reallocation effects. We then find little or no evidence of a decline in the pace of technological change during the 1990s. Both cyclical utilization and reallocations of inputs have played an important role in lowering measured productivity growth relative to true technology growth. Our results thus cast doubt on the explanation of Japan's "lost decade" that attributes the prolonged slump to the observed productivity slowdown.

Keywords: Productivity; Technology; Purified Solow Residual; and Japan

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2004 Bank of Japan All Rights Reserved.

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