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A Flexible Finite-Horizon Alternative to Long-Run Restrictions with an Application to Technology Shocks

Author

Listed:
  • Neville Francis

    (University of North Carolina)

  • Michael T. Owyang

    (Federal Reserve Bank of St. Louis)

  • Jennifer E. Roush

    (Board of Governors, Federal Reserve System)

  • Riccardo DiCecio

    (Federal Reserve Bank of St. Louis)

Abstract

Recent studies using long-run restrictions question the validity of the technology-driven real business cycle hypothesis. We propose an alternative identification that maximizes the contribution of technology shocks to the forecast-error variance of labor productivity at a long but finite horizon. In small-sample Monte Carlo experiments, our identification outperforms standard long-run restrictions by significantly reducing the bias in the short-run impulse responses and raising their estimation precision. Unlike its long-run restriction counterpart, when our Max Share identification technique is applied to U.S. data, it delivers the robust result that hours worked responds negatively to positive technology shocks. © 2014 The President and Fellows of Harvard College and the Massachusetts Institute of Technology

Suggested Citation

  • Neville Francis & Michael T. Owyang & Jennifer E. Roush & Riccardo DiCecio, 2014. "A Flexible Finite-Horizon Alternative to Long-Run Restrictions with an Application to Technology Shocks," The Review of Economics and Statistics, MIT Press, vol. 96(4), pages 638-647, October.
    • Handle: RePEc:tpr:restat:v:96:y:2014:i:4:p:638-647
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    Keywords

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    JEL classification:

    • O21 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Planning Models; Planning Policy
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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