The Decline in Capital Utilization and TFP in the 1990s

Author Name MIYAZAWA Kensuke  (the University of Tokyo)
Creation Date/NO. October 2008 08-J-054
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The estimation of TFP is the foundation of economic analysis and is also important for business practice, but its accuracy is always problematic, owing to theoretical and empirical problems. A decline in the TFP growth in Japan has been observed since the 1990s, but it has been pointed out that this apparent decline is corrupted by the impact of the capital utilization, which should not properly be included in TFP. Nevertheless, since the data concerning the capital utilization is insufficient, it is first necessary to estimate that before estimating real TFP that excludes the impact of the capital utilization.

Research hitherto relating to the estimation of the capital utilization has used (1) theoretical methods for obtaining proxy variables, or (2) the METI Index of Capacity Utilization Ratio, but the problems with these are that, as regards the former, it is not possible to verify the correctness of the proxy variables, and as regards the latter, the coverage of the Index of Capacity Utilization Ratio is inadequate. In this paper I estimate industrial production and capacity utilization in the manufacturing industry by hybridizing these two methods and avoiding each of these problems, and show TFP for the manufacturing industry after excluding their impact.