IMES DISCUSSION PAPER SERIES INSTITUTE FOR MONETARY AND ECONOMIC STUDIES BANK OF JAPAN C.P.O BOX 203 TOKYO 100-8630 JAPAN An Explanation of The Productivity Paradox: TFP Spillover through Capital Accumulation

Recent statistics from the OECD concerning productivity growth at the macroeconomic level show a sort of paradoxical shift in the relationship between the recent upheaval of real investment in new information technology and productivity growth. Table 1 represents the trends of productivity changes in both Japan and the U.S. during the periods 1960-90. Even if there were sizable new investment (including computer and related information facilities) recently, productivity at the macro-economic level could not be improved as well as could be expected by this new investment. These puzzling observations raised a series of discussion points: the so-called ‘conceptualization problem’, or ‘Solow’s paradox’. Several hypotheses have been put forward in attempt to explain these observations in a consistent manner and solve these puzzles: 1) The measurement error hypothesis; 2) the time lag hypothesis; 3) the substitutability hypothesis; 4) the externality hypothesis; and, finally 5) the spillover hypothesis. In this paper, we will try to focus on two of these alternative explanations: the measurement error hypothesis, and the spillover hypotheses. In particular, we will try to emphasize the importance of evaluating the new technology embodied in the capital stock. We proposed two new concepts of measurement of TFP growth: ‘Static unit TFP’ and ‘dynamic unit TFP’. “Static and dynamic unit TFP” are extensions of the ordinary TFP measure, in which can evaluate the spillover effects of recent developments in technology. There has been no paradoxical shift in recent years regarding the relationship between TFP growth and new investment by using our new measures of productivity.