The role of environmental factors in growth accounting

This paper explores a relatively new methodology, the directional distance function method, to analyse productivity growth. The method allows us to explicitly evaluate the role that undesirable outputs of the economy, such as carbon dioxide and other greenhouse gases, have on the frontier production process which we specify as a piecewise linear and convex boundary function. We decompose productivity growth into efficiency change (catching up) and technology change (innovation). We test the statistical significance of the estimates using recently developed bootstrap methods. We also explore implications for growth of total factor productivity in the OECD and Asian economies.