External economies in procyclical productivity: How important are they?

Using the method of Caballero and Lyons (1990, 1992), I examined detailed S wedish manufacturing firm-level data on output and factor inputs from 1979 through 1994. Panel regressions show that an increase in aggregate output a nd inputs appears to raise individual firms' production beyond private marg inal returns, a result consistent with positive external effects from aggre gate activity. However, while considering potential specification difficult ies, this analysis shows that a model in which high-frequency exogenous shi fts in technology drive the business cycle statistically outperforms the Ca ballero-Lyons model. This finding suggests that economywide fluctuations in technology are more important for movements in firms' productivity than ar e external economies.