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Shocking Stuff: Technology, Hours, and Factor Substitution

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  • Cristiano Cantore

    (University of Surrey)

  • Miguel A. Leon-Ledesma

    (University of Kent)

  • Peter McAdam

    (University of Surrey & European Central Bank)

  • Alpo Willman

    (European Central Bank)

Abstract

The response of hours to technology shocks is a key controversy in macroeconomics. We show that differences between RBC and NK models hinge on highly restrictive views of technology. We introduce CES production technologies and demonstrate that the response of hours depends on the factor-augmenting nature of shocks and the capital-labor substitution elasticity in both models. We develop analytical expressions to establish the thresholds determining its sign. This opens new margins for shock identification combining theory and VAR evidence. We discuss how our models provide new robust restrictions for empirical work, especially using the labor income share.

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Bibliographic Info

Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 0913.

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Length: 36 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:sur:surrec:0913

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References

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  1. Holly, S. & Petrella, I., 2010. "Factor Demand Linkages, Technology Shocks and the Business Cycle," Cambridge Working Papers in Economics 1001, Faculty of Economics, University of Cambridge.
  2. Julio J. Rotemberg, 2003. "Stochastic Technical Progress, Smooth Trends, and Nearly Distinct Business Cycles," American Economic Review, American Economic Association, vol. 93(5), pages 1543-1559, December.
  3. Hicks, J. R., 1969. "A Theory of Economic History," OUP Catalogue, Oxford University Press, number 9780198811633, October.
  4. McAdam, Peter & Willman, Alpo, 2013. "Medium Run Redux," Macroeconomic Dynamics, Cambridge University Press, vol. 17(04), pages 695-727, June.
  5. Canova, Fabio & Paustian, Matthias, 2011. "Business cycle measurement with some theory," CEPR Discussion Papers 8364, C.E.P.R. Discussion Papers.
  6. Jordi Galí & Luca Gambetti, 2006. "On the sources of the Great Moderation," Economics Working Papers 1041, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2007.
  7. Camilo E Tovar, 2008. "DSGE models and central banks," BIS Working Papers 258, Bank for International Settlements.
  8. Susanto Basu & John Fernald & Miles Kimball, 2004. "Are technology improvements contractionary?," Working Paper Series WP-04-20, Federal Reserve Bank of Chicago.
  9. Dedola, Luca & Neri, Stefano, 2004. "What Does A Technology Shock Do? A VAR Analysis with Model-based Sign Restrictions," CEPR Discussion Papers 4537, C.E.P.R. Discussion Papers.
  10. Neville Francis & Michael T. Owyang & Athena T. Theodorou, 2003. "The use of long-run restrictions for the identification of technology shocks," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 53-66.
  11. Rainer Klump & Peter McAdam & Alpo Willman, 2012. "The Normalized Ces Production Function: Theory And Empirics," Journal of Economic Surveys, Wiley Blackwell, vol. 26(5), pages 769-799, December.
  12. Chirinko, Robert S., 2002. "Corporate Taxation, Capital Formation,and the Substitution Elasticity between Labor and Capital," National Tax Journal, National Tax Association, vol. 55(N. 2), pages 339-355, June.
  13. Coenen, Günter & McAdam, Peter & Straub, Roland, 2008. "Tax reform and labour-market performance in the euro area: A simulation-based analysis using the New Area-Wide Model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2543-2583, August.
  14. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What happens after a technology shock?," International Finance Discussion Papers 768, Board of Governors of the Federal Reserve System (U.S.).
  15. León-Ledesma, Miguel A. & McAdam, Peter & Willman, Alpo, 2009. "Identifying the elasticity of substitution with biased technical change," Working Paper Series 1001, European Central Bank.
  16. Cantore, Cristiano & Levine, Paul, 2011. "Getting Normalization Right: Dealing with ‘Dimensional Constants’ in Macroeconomics," Dynare Working Papers 9, CEPREMAP.
  17. Levine, Paul & McAdam, Peter & Pearlman, Joseph G., 2007. "Quantifying and sustaining welfare gains from monetary commitment," Working Paper Series 0709, European Central Bank.
  18. Jordi Galí & Pau Rabanal, 2004. "Technology Shocks and Aggregate Fluctuations," IMF Working Papers 04/234, International Monetary Fund.
  19. Michelle Alexopoulos, 2004. "Read All About it: What happens following a technology shock," 2004 Meeting Papers 56, Society for Economic Dynamics.
  20. Chirinko, Robert S., 2008. "[sigma]: The long and short of it," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 671-686, June.
  21. Barbara Rossi & Elena Pesavento, 2004. "Do Technology Shocks Drive Hours Up or Down?," Econometric Society 2004 North American Summer Meetings 96, Econometric Society.
  22. Miguel A León-Ledesma & Peter McAdam & Alpo Willman, 2012. "Non-Balanced Growth and Production Technology Estimation," Studies in Economics 1204, Department of Economics, University of Kent.
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Citations

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Cited by:
  1. Cristiano Cantore & Filippo Ferroni & Miguel A. León-Ledesma, 2012. "The dynamics of hours worked and technology," Banco de Espa�a Working Papers 1238, Banco de Espa�a.
  2. Cristiano Cantore & Paul Levine, 2011. "Getting Normalization Right: Dealing with 'Dimensional Constants' in Macroeconomics," School of Economics Discussion Papers 0511, School of Economics, University of Surrey.
  3. Cristiano Cantore & Filippo Ferroni & Miguel A León-Ledesma, 2012. "Interpreting the Hours-Technology time-varying relationship," Studies in Economics 1201, Department of Economics, University of Kent.
  4. Rainer Klump & Peter McAdam & Alpo Willman, 2012. "The Normalized Ces Production Function: Theory And Empirics," Journal of Economic Surveys, Wiley Blackwell, vol. 26(5), pages 769-799, December.
  5. Cristiano Cantore & Paul Levine & Giovanni Melina, 2013. "A Fiscal Stimulus and Jobless Recovery," IMF Working Papers 13/17, International Monetary Fund.
  6. Paul Levine & Peter McAdam & Peter Welz, 2013. "On Habit and the Socially Efficient Level of Consumption and Work Effort," School of Economics Discussion Papers 0713, School of Economics, University of Surrey.
  7. Pierre Lafourcade & Joris de Wind, 2012. "Taking Trends Seriously in DSGE Models: An Application to the Dutch Economy," DNB Working Papers 345, Netherlands Central Bank, Research Department.
  8. Matteo Ghilardi & Raffaele Rossi, 2011. "Aggregate Stability and Balanced-Budget Rules," School of Economics Discussion Papers 0411, School of Economics, University of Surrey.
  9. Michael A. Flor, 2014. "Post Reunification Economic Fluctuations in Germany: A Real Business Cycle Interpretation," Discussion Paper Series 324, Universitaet Augsburg, Institute for Economics.
  10. McAdam, Peter & Willman, Alpo, 2013. "Medium Run Redux," Macroeconomic Dynamics, Cambridge University Press, vol. 17(04), pages 695-727, June.
  11. Dieppe, Alistair & González Pandiella, Alberto & Willman, Alpo, 2011. "The ECB's New Multi-Country Model for the euro area: NMCM - simulated with rational expectations," Working Paper Series 1315, European Central Bank.
  12. Miguel A. Leon-Ledesma & Mathan Satchi, 2011. "The Choice of CES Production Techniques and Balanced Growth," Studies in Economics 1113, Department of Economics, University of Kent.
  13. McAdam, Peter & Willman, Alpo, 2008. "Medium run redux: technical change, factor shares and frictions in the euro area," Working Paper Series 0915, European Central Bank.

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