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AIYAR SHEKHAR and DALGAARD CARL-JOHAN

countries than do their primal counterparts. Although both primal and dual methodologies confirm the importance of TFP, we find that the TFP series calculated by the primal and dual methods are far from identical (the correlation between them is 0.46), and are significantly different in their ranking of countries. We examine different possible sources for the divergence between the two series and find that it can be accounted for by inconsistencies between our data on the user costs of capital and our data on capital stocks. Using particular country examples, we discuss

Dmitry Plotnikov

− 1 ) ( 29 ) where series z t are calculated using implied productivity innovations as z t = ρ ^ z t − 1 + e t e f f Note that z t in the model is stationary. In contrast, the TFP series in the data are growing: T F P t d a t a ≡ [ Π s = 1 t ( 1 + g s ) ] × e z ˜ t

International Monetary Fund

1 − α = Y t K t α ( LF t ⋅ ( 1 − u t ) ) 1 − α Now with the TFP series and using the other inputs it is possible to decompose GDP growth in the sample period. In the production function approach, the output gap is computed using the TFP generated from the previous equation, but evaluating the production function using trends for all the variables. The usual procedure to generate trends is applied here (HP filter assuming a smoothness parameter

International Monetary Fund

1970s related to the initial frictional costs of structural reforms, in particular those derived from trade liberalization (see Chart 2 ). 2/ It also allows to capture the trend component in labor force participation, which according to García (1995 ), was accompanied by a large cyclical component. Estimates of potential output using the labor input that results from the two approaches to calculate the natural rate of unemployment and the smoothed TFP series show a similar pattern (see Chart 2 , bottom panels), especially for the last decade. In particular

International Monetary Fund

). 65 Two measures of TFP, based on alternative approaches to measuring the factor shares, were used (see Fajgenbaum and others (1998) ): one calculates these shares using the national income accounts, while the other ( TFP-alt ) employs the methodology developed in Sarel (1997) . 66 Because the latter approach yields consistently smaller capital shares than the former and because capital growth exceeds labor growth, the TFP series resulting from the Sarel methodology is at a consistently higher level than the series based on the national income accounts. In terms