The Magnitude of the Task Ahead: Macro Implications of Heterogeneous Technology

The empirical growth literature is dominated by accounting and regression methods that assume common production technology across countries. Our empirical model relaxes this assumption and further allows unobservable determinants of output (total factor productivity, TFP) to differ across countries and time, while accounting for endogeneity and cross‐section correlation arising from global shocks. Using manufacturing sector data for 48 economies, we show that the assumption of common technology is rejected in our regressions. We illustrate that the erroneous choice of homogeneous technology has a substantial impact on the patterns and magnitudes of the resulting TFP estimates.