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Understanding the puzzling effects of technology shocks

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  • Pengfei Wang
  • Yi Wen

Abstract

The research led by Gali (AER 1999) and Basu et al. (AER 2006) raises two important questions regarding the validity of the RBC theory: (i) How important are technology shocks in explaining the business cycle? (ii) Do impulse responses to technology shocks found in the data reject the assumption of flexible prices? This paper argues that the conditional impulse responses of the U.S. economy to technology shocks are not grounds to reject the notion that technology shocks are the main driving force of the business cycle and the assumption of flexible prices, in contrary to the conclusions reached by the literature.

Suggested Citation

  • Pengfei Wang & Yi Wen, 2007. "Understanding the puzzling effects of technology shocks," Working Papers 2007-018, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2007-018
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    Cited by:

    1. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 304-345.
    2. Mumtaz, Haroon & Zanetti, Francesco, 2012. "Neutral technology shocks and employment dynamics: results based on an RBC identification scheme," Bank of England working papers 453, Bank of England.
    3. Sean Holly & Ivan Petrella, 2008. "Factor demand linkages and the business cycle: interpreting aggregate fluctuations as sectoral fluctuations," CDMA Conference Paper Series 0809, Centre for Dynamic Macroeconomic Analysis.
    4. Federico S. Mandelman & Francesco Zanetti, 2008. "Estimating general equilibrium models: an application with labour market frictions," Technical Books, Centre for Central Banking Studies, Bank of England, edition 1, number 1, April.
    5. Federico S. Mandelman & Francesco Zanetti, 2008. "Technology shocks, employment, and labor market frictions," FRB Atlanta Working Paper 2008-10, Federal Reserve Bank of Atlanta.

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    Keywords

    Business cycles; Equilibrium (Economics);

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