The Delayed Response to a Technology Shock: A Flexible Price Explanation

46 Pages Posted: 25 Jul 2004

See all articles by Robert J. Vigfusson

Robert J. Vigfusson

Board of Governors of the Federal Reserve System

Date Written: July 2004

Abstract

I present empirical evidence of how the U.S. economy, including per-capita hours worked, responds to a technology shock. In particular, I present results based on permanent changes to a constructed direct measure of technological change for U.S. manufacturing industries.

Based on empirical evidence, some claim that hours worked declines and never recovers in response to a positive technology shock. This paper's empirical evidence suggests that emphasizing the drop in hours worked is misdirected. Because the sharp drop in hours is not present here, the emphasis rather should be on the small (perhaps negative) initial response followed by a subsequent large positive response. Investment, consumption, and output have similar dynamic responses.

In response to a positive technology shock, a standard flexible price model would have an immediate increase in hours worked. Therefore, such a model is inconsistent with the empirical dynamic responses. I show, however, that a flexible price model with habit persistence in consumption and certain kinds of capital adjustment costs can better match the empirical responses.

Some recent papers have critiqued the use of long run VARs to identify the dynamic responses to a technology shock. In particular they report that, when long run VARs are applied to data simulated from particular economic models, the point estimates of the impulse responses may be imprecisely estimated. However, based on additional simulation evidence, I find that, although the impact response may be imprecisely estimated, a finding of a delayed response is much more likely when the true model response also has a delayed response.

Keywords: Macroeconomic models, vector autoregressions, impulse responses, weak instruments, long-run identification assumption

JEL Classification: D24, E24, E32, O47

Suggested Citation

Vigfusson, Robert John, The Delayed Response to a Technology Shock: A Flexible Price Explanation (July 2004). Available at SSRN: https://ssrn.com/abstract=568221 or http://dx.doi.org/10.2139/ssrn.568221

Robert John Vigfusson (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
121
Abstract Views
1,060
Rank
419,528
PlumX Metrics