Measuring TFP: A Latent Variable Approach

Despite the important role that Total Factor Productivity (TFP) has played in growth literature, few attempts have been made to change the methodology to estimate it. This paper proposes a methodology based on state - space model to estimate TFP and its determinants. With this methodology it is possible to reduce the measurement of the ignorance. As a by-product, this estimation yields the capital share in output and the long-term growth rate. When applied to Chile, the estimation shows a capital share around 0.5 and long term growth of TFP around 1%. Capital accumulation tends to explain more the growth rate in the fast growth periods under the econometric estimation compared to the traditional growth accounting methodology.