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Are technology improvements contractionary?

  • Susanto Basu
  • John G. Fernald
  • Miles S. Kimball

We construct a measure of aggregate technology change, controlling for imperfect competition, varying utilization of capital and labor, and aggregation effects. On impact, when technology improves, input use falls sharply, and output may fall slightly. With a lag of several years, inputs return to normal and output rises strongly. These results are inconsistent with frictionless dynamic general equilibrium models, which generally predict that technology improvements are expansionary, with inputs and (especially) output rising immediately. However, the results are consistent with plausible sticky-price models, which predict the results we find: When technology improves, input use generally falls in the short run, and output itself may also fall.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 625.

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Date of creation: 1998
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