Pure technology gaps and production predictability

An average machine lags in terms of productivity and technological advancement behind a cutting-edge machine. This lag was first defined by Cummins and Violante (2002) as the technology gap. Using the vector error correction model, I show that the technology gap is cointegrated with human capital factors, and then decompose it into a long-run trend and a transitory mean-reverting component, which I term as the pure technology gap. I show that the pure technology gap has a predictive power for the aggregate production. Intuitively, a high pure technology gap acts as an economic shock that increases production in the long term due to a higher future productivity level. (C) 2015 The Board of Trustees of the University of Illinois. Published by Elsevier B.V. All rights reserved.