Investment-specific technological change and growth accounting

Greenwood et al. [1997. Long-run implications of investment-specific technological change. American Economic Review 87(3), 342–362; and 2000. The role of investment-specific technological change in the business cycle. European Economic Review 44, 91–115] and Hercowitz [1998. The ‘embodiment’ controversy: a review essay. Journal of Monetary Economics 41, 217–224] have claimed that the Jorgenson form of growth accounting is conceptually flawed and severely understates the importance of technological progress embodied in new capital goods for explaining growth. To the contrary, this paper shows that in its technology aspects their model is a special case of the Jorgensonian growth accounting model. What they call investment-specific technological change is shown to be closely related to the more familiar concept of total factor productivity (TFP) growth: statements about the one can be translated into statements about the other. Empirically, differences between their conclusions and those of growth accounting studies about the extent to which embodiment explains US economic growth are found to relate more to data than to methodology. r 2006 Bank of England. Published by Elsevier B.V. All rights reserved