This paper develops estimates of TFP growth adjusted for movements in unobserved factor utilization for a panel of 29 countries and up to 37 years. When factor utilization changes are unobserved, the commonly used Solow residual mismeasures actual changes in TFP. We use a general equilibrium dynamic multi-country multi-sector model to derive a production function estimating equation that corrects for unobserved factor usage. We compare the properties of utilization-adjusted TFP series to the standard Solow residual, and quantify the roles of both TFP and utilization for international business cycle comovement. Utilization-adjusted TFP is virtually uncorrelated across countries, and does not generate much GDP comovement through its propagation. Shocks to factor utilization can more successfully account for international comovement.
With dispersed information, how much can agents learn from past endogenous aggregates such as prices or output? In a rational-expectations equilibrium, if general equilibrium effects are strong enough, aggregates no longer perfectly reveal underlying fundamentals. In this con- founding regime, the effects of informational frictions are persistent over time, and the aggregate outcome displays an initial underreaction followed by a delayed overreaction relative to its perfect- information counterpart. In a standard New Keynesian model, we show that the confounding regime is more likely to arise under a dovish monetary policy rule.