Learning Efficiency Shocks, Knowledge Capital and the Business Cycle: A Bayesian Evaluation

McMaster University, Department of Economics Working Paper Series No. 2016-11

42 Pages Posted: 1 Mar 2017

See all articles by Alok Johri

Alok Johri

McMaster University - Department of Economics

Muhebullah Karimzada

McMaster University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: October 20, 2016

Abstract

We incorporate shocks to the efficiency with which firms learn from production activity and accumulate knowledge into an otherwise standard real DSGE model with imperfect competition. Using real aggregate data and Bayesian inference techniques, we find that learning efficiency shocks are an important source of observed variation in the growth rate of aggregate output, investment, consumption and especially hours worked in post-war US data. The estimated shock processes suggest much less exogenous variation in preferences and total factor productivity are needed by our model to account for the joint dynamics of consumption and hours. This occurs because learning efficiency shocks induce shifts in labour demand uncorrelated with current TFP, a role usually played by preference shocks. At the same time, knowledge capital acts like an endogenous source of productivity variation in the model. Measures of model fit prefer the specification with learning efficiency shocks.

Keywords: Business Cycles, Learning-by-Doing, Learning Efficiency Shocks, Knowledge Capital

JEL Classification: E32

Suggested Citation

Johri, Alok and Karimzada, Muhebullah, Learning Efficiency Shocks, Knowledge Capital and the Business Cycle: A Bayesian Evaluation (October 20, 2016). McMaster University, Department of Economics Working Paper Series No. 2016-11, Available at SSRN: https://ssrn.com/abstract=2924656 or http://dx.doi.org/10.2139/ssrn.2924656

Alok Johri (Contact Author)

McMaster University - Department of Economics ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Muhebullah Karimzada

McMaster University - Department of Economics ( email )

Hamilton, Ontario L8S 4M4
Canada

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