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A flexible finite-horizon alternative to long-run restrictions with an application to technology shock

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  • Neville Francis
  • Michael T. Owyang
  • Jennifer E. Roush
  • Riccardo DiCecio

Abstract

Recent studies using long-run restrictions question the validity of the technology-driven real business cycle hypothesis. We propose an alternative identi cation that maximizes the contribution of technology shocks to the forecast-error variance of labor productivity at a long, but finite, horizon. In small-sample Monte Carlo experiments, our identification outperforms standard long-run restrictions by significantly reducing the bias in the short-run impulse responses and raising their estimation precision. Unlike its long-run restriction counterpart, when our Max Share identification technique is applied to U.S. data it delivers the robust result that hours worked responds negatively to positive technology shocks. ; Earlier title: A flexible finite-horizon identification of technology shocks

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2005-024.

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Date of creation: 2010
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Handle: RePEc:fip:fedlwp:2005-024

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Keywords: Time-series analysis ; Business cycles;

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  4. Jordi Gali, 1999. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," American Economic Review, American Economic Association, vol. 89(1), pages 249-271, March.
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  8. Christopher J. Erceg & Luca Guerrieri & Christopher Gust, 2005. "Can Long-Run Restrictions Identify Technology Shocks?," Journal of the European Economic Association, MIT Press, vol. 3(6), pages 1237-1278, December.
  9. Christopher A. Sims & Tao Zha, 1996. "Bayesian methods for dynamic multivariate models," Working Paper 96-13, Federal Reserve Bank of Atlanta.
  10. Jon Faust, 1998. "The robustness of identified VAR conclusions about money," International Finance Discussion Papers 610, Board of Governors of the Federal Reserve System (U.S.).
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  12. John Fernald, 2004. "Trend Breaks, Long Run Restrictions, and the Contractionary Effects of Technology Shocks," 2004 Meeting Papers 477, Society for Economic Dynamics.
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  23. Neville R. Francis & Michael T. Owyang & Athena T. Theodorou, 2005. "What Explains the Varying Monetary Response to Technology Shocks in G-7 Countries?," International Journal of Central Banking, International Journal of Central Banking, vol. 1(3), December.
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