In Beaudry and Portier [2004b], we used U.S. data to document properties of the joint behavior of Total Factor Productivity (hereafter TFP) and stock prices (hereafter SP) that are supportive of a “news view” of business cycles, that is, a view of business cycles where it is news about future developments in productivity that drive fluctuations. In particular, we presented two orthogonalized moving average representation for these variables: one based on an impact restriction and one based on a long run restriction. We then examined the correlation between the innovations that drive the long run movements in TFP and the stock prices innovation which is contemporaneously orthogonal to TFP.
We found this correlation to be positive and almost equal to 1, indicating that permanent changes in productivity growth are preceded by stock market booms. We showed why this observed positive correlation runs counter to that predicted by simple models where surprise changes in productivity drive fluctuations. We also discussed how the pattern could arise if agents have advanced information about future technological opportunities, or if productivity growth emerges as a delayed byproduct of a period high investment activity. In either case, the results suggests that expected changes in technological opportunities may be central to business cycle fluctuations even if surprise changes in productivity are not.
In this paper, we extend this analysis to Japanese aggregate data and U.S. sectoral data. The analysis of aggregate Japanese data confirms our previous results: stock prices innovations do contain most of the information about the long run movements of aggregate TFP, and are responsible for short run business cycle fluctuations. Our econometric setup also allows for an account of the Japanese “lost decade”, and shows that a downward revision of TFP growth in 1990 and 1992, which first revealed itself in stock prices, can account for the low performance of TFP and SP in the 1990s.
Second, we analyze the relation between the aggregate U.S. stock prices innovation and the behavior of sectoral manufacturing TFP. Our analysis of U.S. Manufacturing two-digit data shows that the stock prices news is indeed a shock that does not affect sectoral TFPs on impact, but increases TFP in the long run for those sectors that are driving TFP growth, namely durable goods, and among them equipment sectors.
