Abstract:
Investment-specific technological change (ISTC), reflected in the declining price of new investment goods, has been recognized as an important potential driver of economic growth, business cycles, the labor share, and the equilibrium real rate. However, the changes in investment prices are heavily concentrated in a few capital categories, most notably computers, while most categories exhibit little change. How one aggregates these price changes is hence critical to evaluating the aggregate importance of ISTC. We demonstrate theoretically the correct aggregation approach using a simple standard neoclassical model with multiple capital goods. Importantly, the correct aggregation depends on the question at stake. Second, empirically, we evaluate the quantitative impact of using the correct aggregation procedure. We find that the contribution of ISTC to long-run growth, to business cycles, and to the labor share is smaller than if one ignores aggregation issues.