Production Stages and the Transmission of Technological Progress
CIRPEE Working Paper 08-02
39 Pages Posted: 17 Apr 2008
Date Written: April 2008
Abstract
We develop and estimate a DSGE model which realistically assumes that many goods in the economy are produced through more than one stage of production. Firms produce differentiated goods at an intermediate stage and a final stage, post different prices at both stages, and face stage-specific technological change. Wage-setting households are imperfectly competitive with respect to labor skills. Intermediate-stage technology shocks explain most of short-run output fluctuations, whereas final-stage technology shocks only have a small impact. Despite the dominance of technology shocks, the model predicts a near-zero correlation between hours worked and the return to work and mildly procyclical real wages. The factors mainly responsible for these findings are an input-output linkage between firms operating at the different stages and movements in the relative price of goods. We show that, depending the source, a technology improvement may either have a contractionary or expansionary impact on employment.
Keywords: Business Cycles, Production Stages, Technological Change, Nominal Rigidities
JEL Classification: E32
Suggested Citation: Suggested Citation
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