COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 822

"Are Cyclical Fluctuations in Productivity Due More
to Supply Shocks or Demand Shocks?"

Matthew D. Shapiro

February 1987

Measured productivity is strongly procyclical. Real business cycle theories suggest that actual fluctuations in productivity are the source of fluctuations in aggregate output. Keynesian theories maintain that fluctuations in aggregate output come from shocks to aggregate demand. Keynesian theories appeal to labor hoarding or off the production function behavior to explain the procyclicality of productivity. If observed productivity shocks are true productivity shocks, a function of factor prices should covary exactly with productivity. In annual data for United States industries, that function of factor prices and conventionally-measured productivity move together very closely. Moreover, their difference is uncorrelated with aggregate output.

JEL Classification: 131, 023, 825

Keywords: Business cycles, macroeconomic fluctuations, productivity, aggregate demand, factor prices