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What do technology shocks tell us about the New Keynesian paradigm?

  • Dupor, Bill
  • Han, Jing
  • Tsai, Yi-Chan

Researchers have used unanticipated changes to monetary policy to identify preference and technology parameters of macroeconomic models. This paper uses changes in technology to identify the same set of parameters. Estimates based on technology shocks differ substantially from those based on monetary policy shocks. In the post-World War II United States, a positive technology shock reduces inflation and increases hours worked, significantly and rapidly in both cases. Relative to policy shock identification, technology shock identification implies: (i) long duration durability in preferences instead of short duration habit, (ii) built-in inflation inertia disappears and price flexibility increases. In response to technological improvement, consumption durability increases hours worked because households temporarily increase labor supply to accumulate durables towards a new, higher steady state level. Limited nominal rigidities allow inflation to fall because firms are able to immediately cut prices when households' labor supply increases. Finally, we consider alternative data constructions and econometric specifications; we find that (i) and/or (ii) hold in nearly every case.

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

Volume (Year): 56 (2009)
Issue (Month): 4 (May)
Pages: 560-569

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Handle: RePEc:eee:moneco:v:56:y:2009:i:4:p:560-569
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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