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Procyclical Solow Residuals Without Technology Shocks

Author

Listed:
  • Clarke, Andrew J.
  • Johri, Alok

Abstract

Most real business cycle models have a hard time jointly explaining the twin facts of strongly procyclical Solow residuals and extremely low correlations between wages and hours. We present a model that delivers both these results without using exogenous variation in total factor productivity (technology shocks). The key innovation of the paper is to add learning-by-doing to firms' technology. As a result, firms optimally vary their prices to control the amount of learning, which in turn influences future productivity. We show that exogenous variation in labor wedges (preference shocks) measured from aggregate data deliver around 50% of the standard deviation in the efficiency wedge (Solow residual) as well as realistic second moments for key aggregate variables, which is in sharp contrast to the model without learning-by-doing.

Suggested Citation

  • Clarke, Andrew J. & Johri, Alok, 2009. "Procyclical Solow Residuals Without Technology Shocks," Macroeconomic Dynamics, Cambridge University Press, vol. 13(3), pages 366-389, June.
    • Handle: RePEc:cup:macdyn:v:13:y:2009:i:03:p:366-389_08
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    Cited by:

    1. Alok Johri & Bidyut Talukdar, 2023. "Organizational capital and optimal Ramsey taxation," Indian Economic Review, Springer, vol. 58(1), pages 193-210, July.
    2. Alok Johri & Muhebullah Karimzada, 2021. "Learning efficiency shocks, knowledge capital and the business cycle: A Bayesian evaluation," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(3), pages 1314-1360, November.
    3. Ryota Nakatani, 2024. "Multifactor productivity growth enhancers across industries and countries: firm-level evidence," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 14(2), pages 401-446, June.

    More about this item

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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