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Productivity shocks and aggregate cycles in an estimated endogenous growth model

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  • Jim Malley
  • Ulrich Woitek

Abstract

Using a two-sector endogenous growth model, this paper explores how productivity shocks in the goods and human capital producing sectors contribute to explaining aggregate cycles in output, consump- tion, investment and hours. To contextualize our findings, we also assess whether the human capital model or the standard real business cycle (RBC) model better explains the observed variation in these aggregates. We find that while neither of the workhorse growth mod- els uniformly dominates the other across all variables and forecast horizons, the two-sector model provides a far better fit to the data. Some other key results are first, that Hicks-neutral shocks explain a greater share of output and consumption variation at shorter-forecast horizons whereas human capital productivity innovations dominate at longer ones. Second, the combined explanatory power of the two technology shocks in the human capital model is greater than the Hicks-neutral shock in the RBC model in the medium- and long-term for output and consumption. Finally, the RBC model outperforms the two-sector model with respect to explaining the observed variation in investment and hours.

Suggested Citation

  • Jim Malley & Ulrich Woitek, 2009. "Productivity shocks and aggregate cycles in an estimated endogenous growth model," Working Papers 2009_23, Business School - Economics, University of Glasgow.
  • Handle: RePEc:gla:glaewp:2009_23
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    References listed on IDEAS

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    Cited by:

    1. Michael Funke & Marc Gronwald, 2009. "A Convex Hull Approach to Counterfactual Analysis of Trade Openness and Growth," CESifo Working Paper Series 2692, CESifo Group Munich.
    2. José Luis Torres Chacon, 2015. "Introduction to Dynamic Macroeconomic General Equilibrium Models," Vernon Press Titles in Economics, Vernon Art and Science Inc, edition 2, number 54, Junio.
    3. José Luis Torres Chacon, 2015. "Introduction to Dynamic Macroeconomic General Equilibrium Models [Second Edition, Paperback]," Vernon Press Titles in Economics, Vernon Art and Science Inc, edition 2, number 44.

    More about this item

    Keywords

    endogenous growth; human capital; real business cycles; Bayesian estimation; VAR errors;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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