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Technology Shocks and Employment

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  • Collard, Fabrice
  • Dellas, Harris

Abstract

Recent empirical work has suggested that in response to a positive technology shock, labour productivity rises more than output, while employment shows a persistent decline. This finding has raised doubts concerning the relevance of the RBC model as well as the quantitative significance of technology shocks as a source of aggregate fluctuations. We show that the inability of the RBC model to fit these stylized facts is an artifact of the closed economy assumption. In an open economy, the flexible price RBC model can match the negative conditional correlation between productivity and employment quite well, as long as trade elasticities fall short of unity and the degree of openness is sufficiently high. The computed variance-decompositions also suggest that there is no empirical inconsistency between matching this correlation and accepting that technology shocks are the main source of variation in output. Moreover, using a low trade elasticity value does not worsen performance along any other dimensions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3680.

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Date of creation: Jan 2003
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Handle: RePEc:cpr:ceprdp:3680

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Keywords: employment; flexible prices; open economy; staggered prices; technological shocks;

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References

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  1. Neville Francis & Valerie A. Ramey, 2002. "Is the Technology-Driven Real Business Cycle Hypothesis Dead?," NBER Working Papers 8726, National Bureau of Economic Research, Inc.
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  7. Collard, Fabrice & Dellas, Harris, 2002. "Exchange rate systems and macroeconomic stability," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 571-599, April.
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  12. Michael Dotsey, 1999. "Structure from shocks," Working Paper 99-06, Federal Reserve Bank of Richmond.
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Citations

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Cited by:
  1. Bodenstein, Martin, 2010. "Trade elasticity of substitution and equilibrium dynamics," Journal of Economic Theory, Elsevier, vol. 145(3), pages 1033-1059, May.
  2. Erhan Artuc & Panayiotis M. Pourpourides, 2012. "R&D and Aggregate Fluctuations," Working Papers 2012-01, Central Bank of Cyprus.
  3. Martial Dupaigne & Patrick Fève, 2010. "Hours Worked and Permanent Technology Shocks in Open Economies," Open Economies Review, Springer, vol. 21(1), pages 69-86, February.
  4. Mandelman, Federico S. & Zanetti, Francesco, 2013. "Flexible prices, labor market frictions, and the response of employment to technology shocks," Working Paper 2013-16, Federal Reserve Bank of Atlanta.
  5. 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.
  6. Bodenstein, Martin, 2011. "Closing large open economy models," Journal of International Economics, Elsevier, vol. 84(2), pages 160-177, July.
  7. Dupaigne, Martial & Fève, Patrick, 2005. "Technology Shocks around the World," IDEI Working Papers 346, Institut d'Économie Industrielle (IDEI), Toulouse.
  8. Marchetti, Domenico J. & Nucci, Francesco, 2006. "Pricing Behaviour and the Response of Hours to Productivity Shocks," CEPR Discussion Papers 5504, C.E.P.R. Discussion Papers.
  9. Mandelman, Federico S & Zanetti, Francesco, 2010. "Technology shocks, employment and labour market frictions," Bank of England working papers 390, Bank of England.
  10. Jordi Gali & Pau Rabanal, 2004. "Technology Shocks and Aggregate Fluctuations: How Well Does the RBS Model Fit Postwar U.S. Data?," NBER Working Papers 10636, National Bureau of Economic Research, Inc.
  11. Martin Bodenstein, 2006. "Closing open economy models," International Finance Discussion Papers 867, Board of Governors of the Federal Reserve System (U.S.).
  12. Hashmat Khan & John Tsoukalas, 2005. "Technology Shocks and UK Business Cycles," Macroeconomics 0512006, EconWPA.

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