UC Berkeley

Movements in total factor productivity (TFP) have strong economic implications. For example, improvements in TFP are conducive to long-run economic growth. Also, variations in TFP explain cross-country income differences and, to many real business cycle economists,

TFP shocks account for a large fraction of aggregate fluctuations.

Despite being important, TFP is a black-box, or some sort of measure of our ignorance about the causes of economic growth (Abramotitz 1956, 11). Most economists agree, however, that technological change

is a major component of TFP.

To evaluate the effects of technological change on TFP, there is a need for a good indicator of technical change because conventional indicators, whether presented as indirect or direct measures of technology, have shortcomings. The most important of these shortcomings is

their inability to measure true technical change.

In the essays that follow, I present a new and direct measure of technical change and evaluate its economic implications. The direct measure is derived from actual inventions, in information and communication technology (ICT), identified by engineers that are expert in the field of technology. The exact timing of when the inventions are widely adopted is

determined using contemporaneous and ex-post narrative coverage of the identified innovations. This new indicator of technical change has one key advantage over existing indicators in that it consists of actual inventions chosen by technology experts.

Using the new indicator, I find that technological innovations have

significant impacts on TFP, output, hours, investment and consumption. In addition, and using variation in ICT capital intensity at the sectoral level, I present evidence that industries that use ICT capital more intensively gain more, in terms of productivity, from technological innovations.

This sectoral finding provides new evidence that advances in information technology are not limited to industries that produce information technology, contrary to the neoclassical prediction. Furthermore, narrative evidence suggests that the introduction of major inventions leads

market participants to react positively in anticipation of future improvements in productivity.

A formal test of whether the aggregate S&P 500 significantly responds to technology shocks shows that stock prices fall following technology shocks, a result consistent with the study by Jovanovic and Hobijn (2001).