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Are technology improvements contractionary?

  • Susanto Basu
  • John Fernald
  • Miles Kimball

Yes. We construct a measure of aggregate technology change, controlling for varying utilization of capital and labor, non- constant returns and imperfect competition, and aggregation effects. On impact, when technology improves, input use and non- residential investment fall sharply. Output changes little. With a lag of several years, inputs and investment return to normal and output rises strongly. We discuss what models could be consistent with this evidence. For example, standard one-sector real-business-cycle models are not, since they generally predict that technology improvements are expansionary, with inputs and (especially) output rising immediately. However, the evidence is consistent with simple sticky-price models, which predict the results we find: When technology improves, input use and investment demand generally fall in the short run, and output itself may also fall.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-04-20.

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Date of creation: 2004
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Handle: RePEc:fip:fedhwp:wp-04-20
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