The growing impact of ICT productivity via the cost of capital: Evidence from the U.S. and Japan.

We identify and measure two impacts of industry-level total factor productivity (TFP) growth on aggregate price change in the U.S. and Japan. The first is a standard effect from the definition of aggregate GDP. TFP change lowers aggregate prices ceteris paribus. The second is that a change in TFP in the production of investment goods lowers the cost of capital via lower investment prices. We call this the cost-of-capital effect and formulate an expanded growth accounting framework to capture both effects. We apply it to a harmonized dataset for the two countries and find that the standard effect has fallen since the peak around 2000 due to lower TFP growth and a diminished share of GDP. However, the cost-of-capital effect has risen in importance and offsets part of this decline in the standard effect. • TFP growth in Computer equipment contributes to aggregate TFP growth • This contribution is high in US and Japan, but decelerating since 2004 • Identify how TFP in computers lowers asset prices and cost of capital • Cost-of-capital effect lowers aggregate prices (GDP deflator) • Cost-of-capital effect is rising since 2004 [ABSTRACT FROM AUTHOR]