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Technology Shocks and Employment

  • Collard, Fabrice
  • Dellas, Harris

Recent empirical work has suggested that in response to a positive technology shock, labour productivity rises more than output, while employment shows a persistent decline. This finding has raised doubts concerning the relevance of the RBC model as well as the quantitative significance of technology shocks as a source of aggregate fluctuations. We show that the inability of the RBC model to fit these stylized facts is an artifact of the closed economy assumption. In an open economy, the flexible price RBC model can match the negative conditional correlation between productivity and employment quite well, as long as trade elasticities fall short of unity and the degree of openness is sufficiently high. The computed variance-decompositions also suggest that there is no empirical inconsistency between matching this correlation and accepting that technology shocks are the main source of variation in output. Moreover, using a low trade elasticity value does not worsen performance along any other dimensions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3680.

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Date of creation: Jan 2003
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Handle: RePEc:cpr:ceprdp:3680
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  1. Lawrence J. Christiano & Richard M. Todd, 1996. "Time to plan and aggregate fluctuations," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-27.
  2. Susanto Basu & John Fernald & Miles Kimball, 2002. "Are Technology Improvements Contractionary?," Harvard Institute of Economic Research Working Papers 1986, Harvard - Institute of Economic Research.
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  9. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Can sticky price models generate volatile and persistent real exchange rates?," Staff Report 223, Federal Reserve Bank of Minneapolis.
  10. Neville Francis & Valerie A. Ramey, 2002. "Is the Technology-Driven Real Business Cycle Hypothesis Dead?," NBER Working Papers 8726, National Bureau of Economic Research, Inc.
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  12. John Whalley, 1984. "Trade Liberalization among Major World Trading Areas," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262231204, June.
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