David E. Lebow

The covariability of productivity shocks across industries

Abstract This paper examines the covariability of industry-level productivity shocks to ask whether these shocks could drive an aggregate real business cycle model. Following Halls insight, productivity shocks are measured by purging total factor productivity of its component that is spuriously procyclical due to market power (or labor hoarding). Then the covariability of these productivity shock series is examined in a dynamic factor-analysis model. Removing the spuriously procyclical component of TFP greatly reduces the covariability of productivity shocks, and the aggregate productivity shock estimates are only slightly procyclical. Therefore, the paper provides some direct evidence suggesting that aggregate productivity shocks are of little importance for explaining aggregate output changes.

The Monetisation of Japan's Government Debt

Japans government debt is extremely high, especially considering the fact that the data exclude likely future liabilities stemming from an ageing population and possible requirements of the financial system. Nevertheless, an offsetting factor is the degree to which the Bank of Japan has already monetised the debt. The monetary expansion up to the end of 2003 has increased the net worth of the Bank of Japan, properly measured, to more than 17% of GDP, directly reducing the debt position of the consolidated government and central bank - the most relevant measure of the governments fiscal position. Furthermore, the consolidated debt ratio could fall further depending both on the degree to which the monetary expansion is reversed to prevent inflation from rising too much and on the response of nominal interest rates to any temporary inflation that does occur. Under reasonable scenarios, the consolidated government/central bank debt position could be noticeably lower than indicated by commonly cited debt statistics.