Macroeconomic Theory
Jeffrey Parker, Reed College
Paper of the Week
Assigned paper
Shapiro, Matthew D. 1996. Macroeconomic Implications of Variation in the Workweek of Capital. Brookings Papers on Economic Activity 1996(2):79-119.
Reading suggestions
This paper is quite straightforward to read. It is not a "classic" paper, but it is one that I think has potentially important implications. The pdf includes some comments by other economists and a summary of the ensuing discussion. You are welcome, but not required, to read these.
Questions for analysis
- Empirical implementations of the real-business-cycle model rely on exogenous shocks to productivity (A in the growth-model context) as the main drivers of business cycles. Explain the basic rationale for thinking that measured Solow residuals could be used to measure such shocks.
- In the best possible Solow residual measure (as an estimate of A), how should output and the inputs (particularly capital input) be measured? Why is it important to distinguish between the flow of input services and the available stock of an input?
- Do standard measures of labor input measure the flow of services or the available stock? What about standard measures of capital input?
- Shapiro focuses on the workweek of capital. What does he mean by this? How does he attempt to measure it? Do you find his measures reasonable? What are their principal advantages and shortcomings?
- How would changes in the workweek of capital affect the measured Solow residual using the traditional measure of capital input? What effect does Shapiro find? Do you find his argument convincing?
- Given Shapiro's analysis, is it reasonable to interprete the Solow residual as solely reflecting supply-side productivity shocks? Proponents of RBC models argued that the correlation between measured Solow residuals and business cycles mean that supply shocks are the central source of cycles. How does Shapiro's analysis affect that conclusion?