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Is the technology-driven real business cycle hypothesis dead? Shocks and aggregate fluctuations revisited

  • Francis, Neville
  • Ramey, Valerie A.

In this paper we re-examine the recent evidence that technology shocks do not produce business cycle patterns in the data. We first extend Gali's (1999) work, which uses long-run restrictions to identify technology shocks, by examining whether the identified shocks can be plausibly interpreted as technology shocks. We do this in three ways. First, we derive additional long-run restrictions and use them as tests of overidentification. Second, we compare the qualitative implications from the model with the impulse responses of variables such as wages and consumption. Third, we test whether some standard "exogenous" variables predict the shock variables. We find that ilshocks, military build-ups, and Romer dates do not predict the sholck labeled "technology." We then show ways in which a standard DGE model can be modified to fit Gali's finding that a positive technology shock leads to lower labor input. Finally, we re-examine the properties of the other key shock to the system.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 52 (2005)
Issue (Month): 8 (November)
Pages: 1379-1399

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Handle: RePEc:eee:moneco:v:52:y:2005:i:8:p:1379-1399
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," NBER Working Papers 7534, National Bureau of Economic Research, Inc.
  2. Neville Francis & Valerie A. Ramey, 2006. "The Source of Historical Economic Fluctuations: An Analysis Using Long-Run Restrictions," NBER Chapters, in: NBER International Seminar on Macroeconomics 2004, pages 17-73 National Bureau of Economic Research, Inc.
  3. John Shea, 1999. "What Do Technology Shocks Do?," NBER Chapters, in: NBER Macroeconomics Annual 1998, volume 13, pages 275-322 National Bureau of Economic Research, Inc.
  4. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
  5. Charles L. Evans, 1991. "Productivity shocks and real business cycles," Working Paper Series, Macroeconomic Issues 91-22, Federal Reserve Bank of Chicago.
  6. Beaudry, Paul & Guay, Alain, 1996. "What do interest rates reveal about the functioning of real business cycle models?," Journal of Economic Dynamics and Control, Elsevier, vol. 20(9-10), pages 1661-1682.
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  8. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  9. Jordi Gali & J. David Lopez-Salido & Javier Valles, 2002. "Technology Shocks and Monetary Policy: Assessing the Fed's Performance," NBER Working Papers 8768, National Bureau of Economic Research, Inc.
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  15. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," Cowles Foundation Discussion Papers 870, Cowles Foundation for Research in Economics, Yale University.
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  18. Hoover, Kevin D. & Perez, Stephen J., 1994. "Post hoc ergo propter once more an evaluation of 'does monetary policy matter?' in the spirit of James Tobin," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 47-74, August.
  19. John Bailey Jones, 1999. "Has Fiscal Policy Helped Stabilize the Postwar U.S. Economy?," Discussion Papers 99-03, University at Albany, SUNY, Department of Economics.
  20. Burnside, Craig & Eichenbaum, Martin & Fisher, Jonas D. M., 2004. "Fiscal shocks and their consequences," Journal of Economic Theory, Elsevier, vol. 115(1), pages 89-117, March.
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  23. Valerie A. Ramey & Matthew D. Shapiro, 1999. "Costly Capital Reallocation and the Effects of Government Spending," NBER Working Papers 6283, National Bureau of Economic Research, Inc.
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