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The analytics of technology news shocks

  • William D. Dupor
  • M. Saif Mehkari

This paper constructs several models in which, unlike the standard neoclassical growth model, positive news about future technology generates an increase in current consumption, hours and investment. These models are said to exhibit procyclical news shocks. We find that all models that exhibit procyclical news shocks in our paper have two commonalities. There are mechanisms to ensure that: (I) consumption does not crowd out investment, or vice versa; (II) the benefit of forgoing leisure in response to news shocks outweighs the cost. Among the models we consider, we believe, one model holds the greatest potential for explaining procyclical news shocks. Its critical assumption is that news of the future technology also illuminates the nature of this technology. This illumination in turn permits economic actors to invest in capital that is forward-compatible, i.e. adapted to the new technology. On the technical side, our paper reintroduces the Laplace transform as a tool for studying dynamic economies analytically. Using Laplace transforms we are able to study and prove results about the full dynamics of the model in response to news shocks.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2013-036.

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Date of creation: 2013
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Handle: RePEc:fip:fedlwp:2013-036
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