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News Shocks and Costly Technology Adoption

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  • Yi-Chan Tsai

    (The Ohio State University)

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    Abstract

    I study the macroeconomic response to news of future technological innovation under the assumption that firms cannot frictionlessly shift from existing capital stocks to new varieties associated with the impending advance in technology. Combining this new element with variable capital utilization and preferences designed to minimize wealth effects on labor supply, I develop a model that simultaneously accounts for four stylized facts: (1) slow diffusion of new technologies, (2) lumpiness in microeconomic investment, (3) stock prices leading measured productivity, and (4) comovement of consumption, investment and labor hours. On news of a coming technological innovation, firms begin to invest in new capital goods which will allow them to benefit from the innovation once it arrives. Because fixed costs lead some to delay adoption, there is slow diffusion of the new technology. At the firm level, investment in new technology follows an (S, s) rule, and at the aggregate level the model generates a hump-shaped investment pattern typical of the data. Moreover, the introduction of new capital causes the price of old capital to fall, leading stock prices to rise on news of the new technology. Finally, variable capital utilization slows the onset of diminishing returns to labor, so that work hours rise instantly, permitting rises in both consumption and investment.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 567.

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    Date of creation: 2010
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    Handle: RePEc:red:sed010:567

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    1. Mark E. Doms & Timothy Dunne, 1998. "Capital Adjustment Patterns in Manufacturing Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 409-429, April.
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    3. Thomas F. Cooley & Jeremy Greenwood & Mehmet Yorukoglu, 1994. "The replacement problem," Discussion Paper / Institute for Empirical Macroeconomics 95, Federal Reserve Bank of Minneapolis.
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    9. Lawrence Christiano & Cosmin L. Ilut & Roberto Motto & Massimo Rostagno, 2010. "Monetary Policy and Stock Market Booms," NBER Working Papers 16402, National Bureau of Economic Research, Inc.
    10. Aubhik Khan & B. Ravikumar, 2000. "Costly technology adoption and capital accumulation," Working Papers 00-7, Federal Reserve Bank of Philadelphia.
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    12. Jeffrey R. Campbell, 1997. "Computational Appendix to Entry, Exit, Embodied Technology, and Business Cycles," Technical Appendices campbell98, Review of Economic Dynamics.
    13. Andy Atkeson & Pat Kehoe, 2002. "The transition to a new economy after the Second Industrial Revolution," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
    14. David, Paul A, 1990. "The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox," American Economic Review, American Economic Association, vol. 80(2), pages 355-61, May.
    15. Robert B. Barsky & Eric R. Sims, 2009. "Information, Animal Spirits, and the Meaning of Innovations in Consumer Confidence," NBER Working Papers 15049, National Bureau of Economic Research, Inc.
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