Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/229015 
Year of Publication: 
2020
Series/Report no.: 
ECB Working Paper No. 2401
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
This paper analyses the endogeneity of euro area total factor productivity and its role in business cycle amplification by estimating a medium-scale DSGE model with endogenous productivity mechanism on euro area data. In this framework, total factor productivity evolves endogenously as a consequence of costly investment in R&D and adoption of new technologies. We find that the endogeneity of TFP induces a high degree of persistence in the euro area business cycle via a feedback mechanism between overall economic conditions and investment in productivity-enhancing technologies. As to the sources of the euro area productivity slowdown, we conclude that a decrease in the efficiency of R&D investment is among the key factors generating the pre-crisis productivity slowdown, while starting from the Great Recession a shock to liquidity demand is identified as the most important driving force. The endogenous technology mechanism further exerts a dampening effect on the in ation response following a recessionary shock and hence has important implications for both the negligible fall in in ation during the Great Recession, as well as the sluggish increase of in ation in the subsequent recovery.
Subjects: 
Endogenous Productivity
Euro Area Business Cycles
Weak Growth
Low Inflation
JEL: 
E24
E32
O31
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-4044-3
Document Type: 
Working Paper

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