John G. Fernald

Senior Research Advisor

International Research

Macroeconomics, Productivity growth, China's economy

John.Fernald (at) sf.frb.org

CV

John G. Fernald, Senior Research Advisor, Federal Reserve Bank San Francisco

Show less Current Unpublished Working Papers

Okun’s Macroscope and the Changing Cyclicality of Underlying Margins of Adjustment
2013-32 | With Daly, Jorda, and Nechio | September 2013

+ abstract
A growth-accounting decomposition of “Okun’s Law” sheds light on the empirical magnitude of key margins of adjustment used by firms and households. Using this decomposition, we investigate the evolution of the business-cycle comovement between different components of the production function and unemployment. Changes in the cyclical behavior of labor productivity stand out. Our results provide insight into desirable features of macro models that seek to match central facts about both labor markets and business cycles.

A Quarterly, Utilization-Adjusted Series on Total Factor Productivity
2012-19 | April 2014

+ abstract
This paper describes a real-time, quarterly growth-accounting database for the U.S. business sector. The data on inputs, including capital, are used to produce a quarterly series on total factor productivity (TFP). In addition, the dataset implements an adjustment for variations in factor utilization—labor effort and the workweek of capital. The utilization adjustment follows Basu, Fernald, and Kimball (BFK, 2006). Using relative prices and input-output information, the series are also decomposed into separate TFP and utilization-adjusted TFP series for equipment investment (including consumer durables) and “consumption” (defined as business output less equipment and consumer durables).
+ supplement
quarterly_tfp.xls – Data on quarterly utilization-adjusted TFP

Sector-Specific Technical Change
Manuscript | With Basu, Fisher, and Kimball | November 2013

+ abstract
Theory implies that the economy responds differently to technology shocks that affect the production of consumption versus investment goods. We estimate industry-level technology innovations and use the input-output tables to relax the typical assumptions in the investment-specific technical change literature—assumptions that, we find, do not hold in the data. We find that investment-technology improvements are sharply contractionary for hours, investment, consumption, and output. Consumption-technology improvements, on the contrary, are generally expansionary. Thus, disaggregating technology shocks into consumption and investment-specific changes yields two shocks that both produce business-cycle comovement, and also explain a large fraction of annual changes in GDP and its components. Most of the responses we find are consistent with the predictions of simple two-sector models with sticky prices.

Show less Published Articles (Refereed Journals and Volumes)

Monetary Policy Effectiveness in China: Evidence from a FAVAR Model
Forthcoming in Journal of International Money and Finance | With Spiegel and Swanson

+ abstract
We use a broad set of Chinese economic indicators and a dynamic factor model framework to estimate Chinese economic activity and inflation as latent variables. We incorporate these latent variables into a factor-augmented vector autoregression (FAVAR) to estimate the effects of Chinese monetary policy on the Chinese economy. A FAVAR approach is particularly well-suited to this analysis due to concerns about Chinese data quality, a lack of a long history for many series, and the rapid institutional and structural changes that China has undergone. We find that increases in bank reserve requirements reduce economic activity and inflation, consistent with previous studies. In contrast to much of the literature, however, we find that changes in Chinese interest rates also have substantial impacts on economic activity and inflation, while other measures of changes in credit conditions, such as shocks to M2 or lending levels, do not once other policy variables are taken into account. Overall, our results indicate that the monetary policy transmission channels in China have moved closer to those of Western market economies.
+ supplement
wp2014-07supplement_replication_files.zip – data for replication (6.8 Mb)

Productivity and Potential Output Before, During, and After the Great Recession
In NBER Macroeconomics Annual, ed. by Parker, Woodford, 2014

+ abstract
U.S. labor and total-factor productivity growth slowed prior to the Great Recession. The timing rules explanations that focus on disruptions during or since the recession, and industry and state data rule out “bubble economy” stories related to housing or finance. The slowdown is located in industries that produce information technology (IT) or that use IT intensively, consistent with a return to normal productivity growth after nearly a decade of exceptional IT-fueled gains. A calibrated growth model suggests trend productivity growth has returned close to its 1973-1995 pace. Slower underlying productivity growth implies less economic slack than recently estimated by the Congressional Budget Office. As of 2013, about ¾ of the shortfall of actual output from (overly optimistic) pre-recession trends reflects a reduction in the level of potential.
+ supplement
Fernald_NBER_WP20248_replication.zip – data for replication (244 Mb)
Online_appendix_to.pdf – Online appendix

Labor Markets in the Global Financial Crisis: The Good, the Bad and the Ugly
National Institute Economic Review 228: R58-R64, May 2014 | With Nechio, Daly, and Jorda

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This note examines labor market performance across countries through the lens of Okun’s Law. We find that after the 1970s but prior to the global financial crisis of the 2000s, the Okun’s Law relationship between output and unemployment became more homogenous across countries. These changes presumably reflected institutional and technological changes. But, at least in the short term, the global financial crisis undid much of this convergence, in part because the affected countries adopted different labor market policies in response to the global demand shock.

The Future of U.S. Economic Growth
American Economic Review 104(5), May 2014, 44-49 | With Jones

+ abstract
Modern growth theory suggests that more than 3/4 of growth since 1950 reflects rising educational attainment and research intensity. As these transition dynamics fade, U.S. economic growth is likely to slow at some point. However, the rise of China, India, and other emerging economies may allow another few decades of rapid growth in world researchers. Finally, and more speculatively, the shape of the idea production function introduces a fundamental uncertainty into the future of growth. For example, the possibility that artificial intelligence will allow machines to replace workers to some extent could lead to higher growth in the future.

Growth Accounting with Misallocation: Or, Doing Less with More in Singapore
American Economic Journal: Macroeconomics 3, April 2011, 29-74

+ abstract
We show that in a two-sector economy with heterogeneous capital subsidies and monopoly power, primal and dual measures of TFP growth can diverge from each other as well as from true technology. These distortions give rise to dynamic reallocation effects that imply technology growth needs to be measured from the bottom up rather than from the top down. Using Singapore as an example, we show how incomplete data can be used to estimate aggregate and sectoral technology growth as well as reallocation effects. Our framework can reconcile divergent TFP estimates in Singapore and can resolve other empirical puzzles regarding Asian development.

What Do We Know (and Not Know) about Potential Output?
FRB St Louis Review 91(4), July 2009, 187-213 | With Basu

+ abstract
Potential output is an important concept in economics. Policymakers often use a one-sector neoclassical model to think about long-run growth, and they often assume that potential output is a smooth series in the short run–approximated by a medium- or long-run estimate. But in both the short and the long run, the one-sector model falls short empirically, reflecting the importance of rapid technological change in producing investment goods; and few, if any, modern macroeconomic models would imply that, at business cycle frequencies, potential output is a smooth series. Discussing these points allows the authors to discuss a range of other issues that are less well understood and where further research could be valuable.

A General-Equilibrium Asset-Pricing Approach to the Measurement of Nominal and Real Bank Output
In Price Index Concepts and Measurement, 70, ed. by E. Diewert, J. Greenlees, and C. Hulten | Chicago: University of Chicago Press for NBER, 2009. 273-320 | With Basu and Wang

+ abstract
This paper addresses the proper measurement of financial service output that is not priced explicitly. It shows how to impute nominal service output from financial intermediaries’ interest income, and how to construct price indices for those financial services. We present an optimizing model with financial intermediaries that provide financial services to resolve asymmetric information between borrowers and lenders. We embed these intermediaries in a dynamic, stochastic, general-equilibrium model where assets are priced competitively according to their systematic risk, as in the standard consumption- capital- asset-pricing model. In this environment, we show that it is critical to take risk into account in order to measure financial output accurately. We also show that even using a risk-adjusted reference rate does not solve all the problems associated with measuring nominal financial service output. Our model allows us to address important outstanding questions in output and productivity measurement for financial firms, such as: (1) What are the correct “reference rates” one should use in calculating bank output? (2) If reference rates need to take account of risk, does this mean that they must be ex ante rates of return? (3) What is the right price deflator for the output of financial firms? Is it just the general price index? (4) When–if ever–should we count capital gains of financial firms as part of financial service output?

Trend Breaks, Long-Run Restrictions, and Contractionary Technology Improvements
Journal of Monetary Economics 54(8), November 2007, 2467-2485

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Structural vector autoregressions with long-run restrictions are extraordinarily sensitive to low-frequency correlations. Recent literature finds that the estimated effects of technology shocks are sensitive to how one treats hours per capita. However, after allowing for (statistically and economically significant) trend breaks in productivity, results are much less sensitive: hours fall when technology improves. The issue is that the common high-low-high pattern of productivity growth and hours (i.e., the low-frequency correlation) inevitably leads to a positive estimated response. The trend breaks control for this correlation. This example suggests a practical need for care in using long-run restrictions.
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Information and Communications Technology as a General-Purpose Technology: Evidence from U.S Industry Data
German Economic Review 8(2), May 2007, 146-173 | With Basu

+ abstract
Many people point to information and communications technology (ICT) as the key for understanding the acceleration in productivity in the United States since the mid-1990s. Stories of ICT as a ‘general-purpose technology’ suggest that measured total factor productivity (TFP) should rise in ICT-using sectors (reflecting either unobserved accumulation of intangible organizational capital; spillovers; or both), but with a long lag. Contemporaneously, however, investments in ICT may be associated with lower TFP as resources are diverted to reorganization and learning. We find that U.S. industry results are consistent with general-purpose technology (GPT) stories: the acceleration after the mid-1990s was broad-based–located primarily in ICT-using industries rather than ICT-producing industries. Furthermore, industry TFP accelerations in the 2000s are positively correlated with (appropriately weighted) industry ICT capital growth in the 1990s. Indeed, as GPT stories would suggest, after controlling for past ICT investment, industry TFP accelerations are negatively correlated with increases in ICT usage in the 2000s.

Are Technology Improvements Contractionary?
American Economic Review 96(5), December 2006, 1418-1448 | With Basu and Kimball

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Yes. We construct a measure of aggregate technology change, controlling for aggregation effects, varying utilization of capital and labor, nonconstant returns, and imperfect competition. On impact, when technology improves, input use and nonresidential investment fall sharply. Output changes little. With a lag of several years, inputs and investment return to normal and output rises strongly. The standard one-sector real-business-cycle model is not consistent with this evidence. The evidence is consistent, however, with simple sticky-price models, which predict the results we find: when technology improves, inputs and investment generally fall in the short run, and output itself may also fall.
+ supplement
BFK-Technology-Series.xls contains the main aggregate data series we constructed for the paper. It also contains industry technology estimates.
Industry_BFK_Data.xls – contains additional underlying industry data. These include growth rates for gross output, value added, primary inputs, total inputs, and hours per worker; and factor shares.

The Case of the Missing Productivity Growth: Or, Does Information Technology Explain Why Productivity Accelerated in the United States but Not the United Kingdom?
NBER Macroeconomics Annual, 2003 | With Basu, Oulton, and Srinivasan

+ abstract
We argue that unmeasured investments in intangible organizational capital associated with the role of information and communications technology (ICT) as a general purpose technology’ can explain the divergent U.S. and U.K. TFP performance after 1995. GPT stories suggest that measured TFP should rise in ICT-using sectors, perhaps with long lags. Contemporaneously, investments in ICT may in fact be associated with lower TFP as resources are diverted to reorganization and learning. In both the U.S. and U.K., we find a strong correlation between ICT use and industry TFP growth. The U.S. results, in particular, are consistent with GPT stories: the TFP acceleration was located primarily in ICT-using industries and is positively correlated with industry ICT capital growth from the 1980s and early 1990s. Indeed, as GPT stories suggest, controlling for past ICT growth, industry TFP growth appears negatively correlated with increases in ICT capital services in the late 1990s. A somewhat different picture emerges for the U.K. TFP growth does not appear correlated with lagged ICT capital growth. But TFP growth in the late 1990s is strongly and positively associated with the growth of ICT capital services, while being strongly and negatively associated with the growth of ICT investment.

Puzzles in the Chinese Stock Market
Review of Economics and Statistics, August 2002 | With Rogers

Aggregate Productivity and Aggregate Technology
European Economic Review, June 2002 | With Basu

Productivity Growth in the 1990s: Technology, Utilization, or Adjustment?
Carnegie-Rochester Series on Public Policy, December 2001 | With Basu and Shapiro

Was China the First Domino? Assessing the Links between China and the Rest of Emerging Asia
Journal of International Money and Finance, August 1999 | With Edison and Loungani

+ supplement
Fernald-et-al-China-official-and-swap-exchange-rates-pre-1994.xls – Nominal Exchange Rates RMB/US$ and Chinese Inflation

Roads to Prosperity? Assessing the Link between Public Capital and Productivity
American Economic Review, June 1999, 619-638

Returns to Scale in U.S. Manufacturing: Estimates and Implications
Journal of Political Economy, April 1997 | With Basu

Are Apparent Productive Spillovers a Figment of Specification Error?
Journal of Monetary Economics, August 1995 | With Basu

Show less FRBSF Publications

Has China’s Economy Become More “Standard”?
Economic Letter 2014-30 | October 6, 2014 | With Hsu and Spiegel

Interpreting Deviations from Okun’s Law
Economic Letter 2014-12 | April 21, 2014 | With Daly, Jorda, and Nechio

Labor Markets in the Global Financial Crisis
Economic Letter 2013-38 | December 23, 2013 | With Daly, Jorda, and Nechio

On the Reliability of Chinese Output Figures
Economic Letter 2013-08 | March 25, 2013 | With Malkin and Spiegel

What Is the Value of Bank Output?
Economic Letter 2011-15 | May 16, 2011 | With Alon, Inklaar, and Wang

Growth Accounting, Potential Output, and the Current Recession
Economic Letter 2009-26 | August 17, 2009 | With Matoba

Information and Communications Technology as a General Purpose Technology: Evidence from U.S. Industry Data
Economic Review | 2008 | With Basu

Will Fast Productivity Growth Persist?
Economic Letter 2007-09 | April 6, 2007 | With Thipphavong and Trehan

Financial Innovations and the Real Economy: Conference Summary
Economic Letter 2007-05 | March 2, 2007 | With Doms and Lopez

Is a Recession Imminent?
Economic Letter 2006-32 | November 24, 2006 | With Trehan

Shifting Data: A Challenge for Monetary Policymakers
Economic Letter 2005-35 | December 9, 2005 | With Wang

Why Hasn’t the Jump in Oil Prices Led to a Recession?
Economic Letter 2005-31 | November 18, 2005 | With Trehan

Show more Other Works

Comrades or Competitors? On Trade Relationships between China and Emerging Asia
Chicago Fed Letter 200, March 2004

+ abstract
What are the implications of China’s economic growth for its neighboring economies? Do the mutual benefits outweigh the costs of intensifying competition in emerging Asia? Recent research on trade between Asia and the U.S., as well as among the Asian economies, highlights the changing nature of these relationships and the attendant costs and benefits for all parties.

The Acceleration in U.S. Total Factor Productivity after 1995: The Role of Information Technology
FRB Chicago Economic Perspectives 28(1), Q1 2004, 52-66 | With Ramnath

+ abstract
After the mid-1990s, labor and total factor productivity (TFP) accelerated in the United States. A growing body of research has explored the robustness of the U.S. acceleration, generally concluding that it reflects an underlying technology acceleration. This research, along with considerable anecdotal and microeconomic evidence, suggests a substantial role for information and communications technology (ICT). In this article, we briefly discuss the results of socalled growth accounting at the aggregate level. We then look more closely at the experience since the mid- 1990s, when TFP accelerated. We look at data on which industries account for the TFP acceleration: Were the 1990s a time of rising total factor productivity growth outside of the production of ICT? Our industry data strongly support the view that a majority of the TFP acceleration reflects an acceleration outside of the production of ICT goods and software.2 Even when we focus on arguably “well-measured” sectors (Griliches 1994; Nordhaus 2002), we find a substantial TFP acceleration outside of ICT production.

China and Emerging Asia: Comrades or Competitors?
In The Post-Crisis Macroeconomic Adjustment in Asia. Proceedings from a conference hosted by the Seoul Journal of Economics, 2003 | With Ahearne, Loungani, and Schindler

+ abstract
This is the first paper to empirically examine whether a country’s use of an import restricting trade policy distorts a foreign country’s exports to third markets. We first develop a theoretical model of worldwide trade in which the imposition of antidumping and safeguard tariffs, or “trade remedies,” by one country causes significant distortions in world trade flows. We then empirically test this model by investigating the effect of the United States’ use of such import restrictions on Japanese exports of roughly 4800 products into 37 countries between 1992 and 2001. Our estimation yields evidence that US restrictions both deflect and depress Japanese export flows to third countries. Imposition of a US antidumping measure against Japan deflects trade, as the average antidumping duty on Japanese exports leads to a 5-7% increase in Japanese exports of the same product to the average third country market. The imposition of a US antidumping measure against a third country depresses trade, as the average US duty imposed on a third country leads to a 5-19% decrease in Japanese exports of that same product to the average third country’s market. We also document the substantial variation in trade deflection and trade depression across different importing countries and exported products.

Information Technology and the U.S. Productivity Acceleration
Chicago Fed Letter 193, September 2003

+ abstract
Whatever happened to the New Economy? The good news is U.S. productivity continues to grow at a healthy pace. This article sheds light on why information and communications technology may continue to pay dividends for years to come.

A Discussion of Productivity Growth and Technology
In Technology, Growth, and the Labor Market, ed. by Ginther and Zavodny | Netherlands: Kluwer Academic Publishers, 2002

Countering Contagion: Does China’s Experience Offer a Blueprint?
FRB Chicago Economic Perspectives 25(4), Fall 2001, 38-52 | With Ahearne and Loungani

+ abstract
China did not succumb to the Asian crisis of 1997-99, despite two apparent sources of vulnerability: a weak financial system and increased export competition from the Asian crisis economies. This article argues that both sources of vulnerability were more apparent than real. China’s experience (especially its use of capital controls) does not offer a blueprint for other countries, because other countries would not want to replicate China’s inefficient, non-market-oriented financial system.

The Fall and Rise of the Global Economy
Chicago Fed Letter 164, April 2001 | With Greenfield

+ abstract
Anyone who follows the news, even casually, or reads product labels, is aware that the world economy has become more interdependent in recent decades. Indeed, the worldwide integration of national economies–through goods and services trade, capital flows and operational linkages among firms–has never before been as broad or as deep.

Why Is Productivity Procyclical? Why Do We Care?
In New Directions in Productivity Analysis. Studies in Income and Wealth Vol. 63, ed. by Dean, Harper, and Hulten | Chicago: University of Chicago Press, 2001 | With Basu

Growth, Reform, and the Effects of the Asian Crisis on China
China Business Review, September 1999

Why Has China Survived the Asian Crisis So Well? What Risks Remain?
In Financial Market Reform in China: Progress, Problems, and Prospects, ed. by Chen, Dietrich, and Feng | Westview Press, 1999 | With Babson