Research Topics
Publications on Accounting identity

Is Anything Left of the Debate about the Sources of Growth in East Asia Thirty Years Later?
Working Paper No. 1029  September 2023The year 2023 commemorates the 30th anniversary of the publication of the influential, yet controversial, study The East Asian Miracle report by the World Bank (1993). An important part of the report’s analysis was concerned with the sources of growth in East Asia. This was based on the neoclassical decomposition of growth into productivity and factor accumulation. At about the same time, the publication of Alwyn Young’s (1992, 1995) and J. I. Kim and Lawrence Lau’s (1994) studies, and Paul Krugman’s (1994) popularization of the “zero total factor productivity growth” thesis, led to a very important debate within the profession, on the sources of growth in East Asia. The emerging literature on China’s growth during the 1990s also used the neoclassical growth model to decompose overall growth into total factor productivity growth and factor accumulation. This survey reviews what the profession has learned during the last 30 years about East Asia’s growth, using growthaccounting exercises and estimations of production functions. It demystifies this literature by pointing out the significant methodological problems inherent in the neoclassical growthaccounting approach. We conclude that the analysis of growth within the framework of the neoclassical model should be seriously questioned. Instead, we propose that researchers look at other approaches, for example, the balanceofpayments–constrained growth rate approach of Thirlwall (1979) or the product space of Hidalgo et al. (2007), together with the notion of complexity of Hidalgo and Hausmann (2009). 
Why the FeldsteinHorioka “Puzzle” Remains Unsolved
Working Paper No. 1006  April 2022This paper argues that the 40yearold FeldsteinHorioka “puzzle” (i.e., that in a regression of the domestic investment rate on the domestic saving rate, the estimated coefficient is significantly larger than what would be expected in a world characterized by high capital mobility) should have never been labeled as such. First, we show that the investment and saving series typically used in empirical exercises to test the FeldsteinHorioka thesis are not appropriate for testing capital mobility. Second, and complementary to the first point, we show that the FeldsteinHorioka regression is not a model in the econometric sense, i.e., an equation with a proper error term (a random variable). The reason is that by adding the capital account to their regression, one gets the accounting identity that relates the capital account, domestic investment, and domestic saving. This implies that the estimate of the coefficient of the saving rate in the FeldsteinHorioka regression can be thought of as a biased estimate of the same coefficient in the accounting identity, where it has a value of one. Since the omitted variable is known, we call it “pseudo bias.” Given that this (pseudo) bias is known to be negative and less than one in absolute terms, it should come as no surprise that the FeldsteinHorioka regression yields a coefficient between zero and one.Download:Associated Program:Author(s): 
Production Function Estimation
Working Paper No. 994  October 2021Biased Coefficients and Endogenous Regressors, or a Case of Collective Amnesia?
The possible endogeneity of labor and capital in production functions, and the consequent bias of the estimated elasticities, has been discussed and addressed in the literature in different ways since the 1940s. This paper revisits an argument first outlined in the 1950s, which questioned production function estimations. This argument is that output, capital, and employment are linked through a distribution accounting identity, a key point that the recent literature has overlooked. This identity can be rewritten as a form that resembles a production function (CobbDouglas, CES, translog). We show that this happens because the data used in empirical exercises are value (monetary) data, not physical quantities. The argument has clear predictions about the size of the factor elasticities and about what is commonly interpreted as the bias of the estimated elasticities. To test these predictions, we estimate a typical CobbDouglas function using five estimators and show that: (i) the identity is responsible for the fact that the elasticities must be the factor shares; (ii) the bias of the estimated elasticities (i.e., departure from the factor shares) is, in reality, caused by the omission of a term in the identity. However, unlike in the standard omittedvariable bias problem, here the omitted term is known; and (iii) the estimation method is a secondorder issue. Estimation methods that theoretically deal with endogeneity, including the most recent ones, cannot solve this problem. We conclude that the use of monetary values rather than physical data poses an insoluble problem for the estimation of production functions. This is, consequently, far more serious than any supposed endogeneity problems.Download:Associated Program:Author(s): 
Problems with Regional Production Functions and Estimates of Agglomeration Economies
Working Paper No. 725  May 2012A Caveat Emptor for Regional Scientists
Over the last 20 years or so, mainstream economists have become more interested in spatial economics and have introduced largely neoclassical economic concepts and tools to explain phenomena that were previously the preserve of economic geographers. One of these concepts is the aggregate production function, which is also central to much of regional growth theory. However, as Franklin Fisher, inter alios, has shown, the conditions necessary to aggregate microproduction functions into an aggregate production function are so stringent that in all probability the aggregate production function does not exist. This paper shows that the good statistical fits commonly found empirically are solely due to the use of value data and an underlying accounting identity. The result is that the estimates obtained cannot be regarded as providing evidence of the underlying technological structure of the spatial economy, including the aggregate elasticity of substitution, the degree of returns to scale, and the rate of technical progress.

Aggregate Production Functions and the Accounting Identity Critique
Working Paper No. 718  May 2012Further Reflections on Temple’s Criticisms and Misunderstandings
In a reply to Felipe and McCombie (2010a), Temple (2010) has largely ignored the main arguments that underlie the accounting identity critique of the estimation of production functions using value data. This criticism suggests that estimates of the parameters of aggregate production functions cannot be regarded as reflecting the underlying technology of the industry. While Temple concedes some points, he erroneously believes that the critique holds only under some ad hoc assumptions. As a consequence, he argues that the critique works only “parttime.” This rejoinder discusses Temple’s arguments and demonstrates that the critique works fulltime.