Working Paper no. 129
By Hasan Bakhshi and Jens Larsen
This paper analyses the impact of rapid technological change in the information and communications technology (ICT) sector on economic growth. Technological change in the ICT sector leads to a fall in the relative price of ICT goods, which leads firms to invest more heavily in high-tech goods. The approach is to build a dynamic general equilibrium model that is consistent with key stylised facts of the UK economy. We use that model to quantify the contribution to long-run growth of technological progress that is specific to the ICT sector. We find that technological progress that is specific to the ICT sector might account for around 20%-30% of long-run labour productivity growth, if this progress continues at the rate observed over the past 25 years. But this conclusion depends crucially on how ICT prices are measured and in particular on the estimate of the long-run rate of decline of ICT prices. We show that shocks to technological progress that is specific to production of ICT investment goods can have very different macroeconomic implications from a shock that applies to production of all goods. We demonstrate that a permanent increase in the growth rate of ICT-specific technological progress will increase the investment expenditure share of GDP but lower the aggregate depreciation rate, while an increase in the return to investment in ICT will increase both the expenditure share and the depreciation rate.