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The Finance and Economics Discussion Series logo links to FEDS home page Computers and Growth with Costs of Adjustment: Will the Future Look Like the Past?
Michael T. Kiley

Abstract: This paper augments the traditional growth accounting framework by including a common specification of investment adjustment costs and uses the new framework to examine the past and likely future growth in nonfarm business output in the United States. The inclusion of adjustment costs can have large effects on the growth-accounting exercise when a new investment good is introduced--such as computers in the last thirty years. The new framework indicates that the contribution of computers to economic growth has been held down by the large adjustment costs required to incorporate a new investment good into the economy's capital stock. Alternative calibrations of the model suggest that these adjustment costs have lowered measured growth in multifactor productivity since 1974 by about 1/2 percentage point--a nontrivial percentage of the productivity slowdown. Combining the adjustments to multifactor productivity and the impact of computers implied by the model with adjustment costs boosts long-run growth in output per hour 3/4 percentage point above the 1974-1991 average.

Keywords: Computers, productivity

Full paper (85 KB PDF)

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Last update: September 8, 1999