Abstract
This paper studies the sources of growth for Taiwan from 1961 to 2002 using a diagnostic tool, known as business cycle accounting, developed in the recent business cycle literature. The results show that the path of Taiwanese growth would not have been achieved without improvements in total factor productivity (TFP). In addition, there are significant distortions in capital markets in the equilibrium investment decisions of agents operating in otherwise competitive capital markets. Finally, frictions in labor markets also contribute to growth but are minor relative to TFP growth and frictions in capital markets