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Are Technology Improvements Contractionary?

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Author Info
Susanto Basu
John G. Fernald
Miles S. Kimball

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Abstract

Yes. We construct a measure of aggregate technology change, controlling for aggregation effects, varying utilization of capital and labor, nonconstant returns, and imperfect competition. On impact, when technology improves, input use and nonresidential investment fall sharply. Output changes little. With a lag of several years, inputs and investment return to normal and output rises strongly. The standard one-sector real-business-cycle model is not consistent with this evidence. The evidence is consistent, however, with simple sticky-price models, which predict the results we find: when technology improves, inputs and investment generally fall in the short run, and output itself may also fall. (JEL E22, E32, O33)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 96 (2006)
Issue (Month): 5 (December)
Pages: 1418-1448
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Handle: RePEc:aea:aecrev:v:96:y:2006:i:5:p:1418-1448

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References listed on IDEAS
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  32. Susanto Basu & Miles S. Kimball, 1997. "Cyclical Productivity with Unobserved Input Variation," NBER Working Papers 5915, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  33. Jonas D. M. Fisher, 2002. "Technology shocks matter," Working Paper Series WP-02-14, Federal Reserve Bank of Chicago. [Downloadable!]
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  34. Marios Zachariadis, . "R&D, Innovation, and Technological Progress: A Test of the Schumpeterian Framework Without Scale Effects," Departmental Working Papers 2002-18, Department of Economics, Louisiana State University. [Downloadable!]
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  45. Valerie Ramey & Neville Francis, 2002. "Is The Technology-Driven Real Business Cycle Hypothesis Dead? Shocks and Aggregate Fluctuations Revisted," University of California at San Diego, Economics Working Paper Series 2002-03, Department of Economics, UC San Diego. [Downloadable!]
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  46. Cooley, Thomas F. & Dwyer, Mark, 1998. "Business cycle analysis without much theory A look at structural VARs," Journal of Econometrics, Elsevier, vol. 83(1-2), pages 57-88. [Downloadable!] (restricted)
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  48. Basu, Susanto, 1996. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 719-51, August. [Downloadable!] (restricted)
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