TY - JOUR AU - Basu,Susanto AU - Fernald,John TI - Why Is Productivity Procyclical? Why Do We Care? JF - National Bureau of Economic Research Working Paper Series VL - No. 7940 PY - 2000 Y2 - October 2000 UR - http://www.nber.org/papers/w7940 L1 - http://www.nber.org/papers/w7940.pdf N1 - Author contact info: Susanto Basu Department of Economics Boston College 140 Commonwealth Avenue Chestnut Hill, MA 02467 Tel: 617/552-2182 Fax: 617/552-2308 E-Mail: susanto.basu@bc.edu John Fernald Research Department, Mail Stop 1130 Federal Reserve Bank of San Francisco 101 Market St San Francisco, CA 94105 Tel: 415-974-2135 Fax: 815-642-0515 E-Mail: john.fernald@sf.frb.org M1 - published as Susanto Basu, John Fernald. "Why Is Productivity Procyclical? Why Do We Care?," in Charles R. Hulten, Edwin R. Dean and Michael J. Harper, editors, "New Developments in Productivity Analysis" University of Chicago Press (2001) AB - Productivity rises in booms and falls in recessions. There are four main explanations for this procyclical productivity: (i) procyclical technology shocks, (ii) widespread imperfect competition and increasing returns, (iii) variable utilization of inputs over the cycle, and (iv) resource reallocations. Recent macroeconomic literature views this stylized fact of procyclical productivity as an essential feature of business cycles because each explanation has important implications for macroeconomic modeling. In this paper, we discuss empirical methods for assessing the importance of these four explanations. We provide microfoundations for our preferred approach of estimating an explicitly first-order approximation to the production function, using a theoretically motivated proxy for utilization. When we implement this approach, we find that variable utilization and resource reallocations are particularly important in explaining procyclical productivity. We also argue that the reallocation effects that we identify are not biases' they reflect changes in an economy's ability to produce goods and services for final consumption from given primary inputs of capital and labor. Thus, from a normative viewpoint, reallocations are significant for welfare; from a positive viewpoint, they constitute potentially important amplification and propagation mechanisms for macroeconomic modeling. ER -