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Technology Shocks and Business Cycles: The Role of Processing Stages and Nominal Rigidities

  • Louis Phaneuf
  • Nooman Rebei

This paper develops and estimates a dynamic general equilibrium model that realistically accounts for an input-output linkage between firms operating at different stages of processing. Firms face technological change which is specific to their processing stage and charge new prices according to stage-specific Calvo-probabilities. Only a fixed fraction of households have an opportunity to adjust nominal wages to new information each period. Intermediate-stage technology shocks account for the bulk of output variability at business cycle frequencies, while final-stage technology shocks do not explain much. Although technology shocks drive the business cycle, the model predicts weakly procyclical real wages, and a near-zero correlation between return to working and hours worked. Furthermore, the model has rich implications for the dynamics of business cycles.

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Paper provided by Bank of Canada in its series Working Papers with number 07-7.

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Length: 42 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:bca:bocawp:07-7
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