Economic Change and the Aggregate Production Function

The aggregate production function is a central pillar of macroeconomics. Both growth and business cycle theories oer predictions that depend on the speci…cation of the aggregate technology. Leaving existence issues aside, the aggregate production function is the aggregation of all the micro-technologies present in the economy. If the micro-technologies change over time, so should the aggregate technology. In this paper I document the large shift in the US productive equipment composition, the so-called IT revolution, and study the stability of the aggregate production function over time. I present a disaggregated …rm dymanic model that leads to an aggregate short-run technology, a mapping from the variable input to output, and an aggregate long-run technology, a mapping from aggregate investment to future capacity. I perform an empirical analysis using a detailed dataset that covers the US manufacturing sector. To address the issue of stability, I look at the key elasticities that characterize of the aggregate technology. The results show that the long-run production function exhibits a remarkable invariance. The short-run production function, on the other hand, exhibits some instability. Finally, I show that the aggregate technology is not well approximated by a Cobb-Douglas.