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Business cycle non-linearities and productivity shocks

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  • Paolo Piselli

    ()
    (Banca d'Italia)

Abstract

The recent empirical evidence documenting the presence of asymmetries in business cycles represents a challenge for the standard equilibrium models of real business cycle. These models successfully explain most first and second moments of the actual time series, but cannot replicate non-linear features of the data, unless a non-linear innovation is introduced. This paper aims at investigating the possible non-linearity in the technology shock, the basic innovation in Real Business Cycle models. In order to measure the unobservable technology shock, we derive some alternative measures of total factor productivity such as revenue-based and cost-based Solow residual and we also control for cyclical factor utilisation. We test for non-linearities and model a nonlinear SETAR model for the productivity shock as a natural extension of the autoregressive linear process, the standard way of representing technology shocks. Our findings suggest that, although the standard Solow residual turns out to be linear, the other measures of technology shock appear non-linear, as soon as non-technological cyclical components are ruled out.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 516.

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Date of creation: Jul 2004
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Handle: RePEc:bdi:wptemi:td_516_04

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Related research

Keywords: Solow residual; technology shock; non-linear models; linearity test;

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Cited by:
  1. Almeida, Pedro Cameira de & Fuinhas, José Alberto & Marques, António Cardoso, 2011. "A assimetria dos ciclos económicos: Evidência internacional usando o teste triples
    [The asymmetry of business cycles: International evidence using triples test]
    ," MPRA Paper 35208, University Library of Munich, Germany.
  2. Sella Lisa, 2008. "Old and New Spectral Techniques for Economic Time Series," Department of Economics and Statistics Cognetti de Martiis. Working Papers 200809, University of Turin.

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