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Is The Technology-Driven Real Business Cycle Hypothesis Dead? Shocks and Aggregate Fluctuations Revisted

Listed author(s):
  • Ramey, Valerie A
  • Francis, Neville

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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Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt6x80k3nx.

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Date of creation: 01 Jan 2002
Handle: RePEc:cdl:ucsdec:qt6x80k3nx
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  1. 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.
  2. 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.
  3. Jordi Galí & David López-Salido & Javier Vallés, 2000. "Technology Shocks and Monetary policy: Assessing the Fed's Performance," Working Papers 0013, Banco de España;Working Papers Homepage.
  4. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-947, October.
  5. Matthew Shapiro & Mark Watson, 1988. "Sources of Business Cycles Fluctuations," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 111-156 National Bureau of Economic Research, Inc.
  6. Charles L. Evans, 1991. "Productivity shocks and real business cycles," Working Paper Series, Macroeconomic Issues 91-22, Federal Reserve Bank of Chicago.
  7. Susanto Basu & John Fernald & Miles Kimball, 2004. "Are Technology Improvements Contractionary?," NBER Working Papers 10592, National Bureau of Economic Research, Inc.
  8. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers 497, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. 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.
  10. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
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  12. Galí, Jordi, 1996. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," CEPR Discussion Papers 1499, C.E.P.R. Discussion Papers.
  13. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
  14. Lawrence J. Christiano & Michele Boldrin & Jonas D. M. Fisher, 2001. "Habit Persistence, Asset Returns, and the Business Cycle," American Economic Review, American Economic Association, vol. 91(1), pages 149-166, March.
  15. Ahmend, S. & Yoo, B.S., 1993. "Fiscal Trends in Real Economic Aggregates," Papers 10-93-13, Pennsylvania State - Department of Economics.
  16. 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.
  17. Ramey, Valerie A. & Shapiro, Matthew D., 1998. "Costly capital reallocation and the effects of government spending," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 145-194, June.
  18. 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.
  19. Lawrence J. Christiano & Martin Eichenbaum & Robert J. Vigfusson, 2003. "What happens after a technology shock?," International Finance Discussion Papers 768, Board of Governors of the Federal Reserve System (U.S.).
  20. King, Robert G. & Rebelo, Sergio T., 1999. "Resuscitating real business cycles," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007 Elsevier.
  21. Michael Dotsey, 2002. "Structure from shocks," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 37-47.
  22. 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.
  23. King, R.G. & Baxter, M., 1990. "Fiscal Policy In General Equilibrium," RCER Working Papers 244, University of Rochester - Center for Economic Research (RCER).
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