Utilization-Adjusted TFP Across Countries: Measurement and Implications for International Comovement

This paper develops estimates of TFP growth adjusted for movements in unobserved factor utilization for a panel of 29 countries and up to 37 years. When factor utilization changes are unobserved, the commonly used Solow residual mismeasures actual changes in TFP. We use a general equilibrium dynamic multi-country multi-sector model to derive a production function estimating equation that corrects for unobserved factor usage. We compare the properties of utilization-adjusted TFP series to the standard Solow residual, and quantify the roles of both TFP and utilization for international business cycle comovement. Utilization-adjusted TFP is virtually uncorrelated across countries, and does not generate much GDP comovement through its propagation. Shocks to factor utilization can more successfully account for international co-movement.