TOTAL FACTOR PRODUCTIVITY GROWTH IN US COMMERCIAL BANKING FOR 1935-1991 - A LATENT VARIABLE APPROACH USING THE KALMAN FILTER

This paper studies total factor productivity (TFP) in U.S. commercial banking for 1935-1991. TFP can contain a procyclical bias when some in put factors are not freely variable, causing their shadow and market p rices to differ. We correct this bias in TFP by decomposing it into it s latent stochastic trend and cyclical components by employing the Kal man filter. Using the FDIC's annual aggregate data on U.S. insured com mercial banks, we report that the stochastic trend has been positive d uring 1935-1991, with an average annual growth rate of 2.27%, and that it exhibits a decaying time path. We attribute the positive TFP growt h to technical change.