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What (Really) Accounts for the Fall in Hours After a Technology Shock?

  • Nooman Rebei
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    The paper asks how state of the art DSGE models that account for the conditional response of hours following a positive neutral technology shock compare in a marginal likelihood race. To that end we construct and estimate several competing small-scale DSGE models that extend the standard real business cycle model. In particular, we identify from the literature six different hypotheses that generate the empirically observed decline in worked hours after a positive technology shock. These models alternatively exhibit (i) sticky prices; (ii) firm entry and exit with time to build; (iii) habit in consumption and costly adjustment of investment; (iv) persistence in the permanent technology shocks; (v) labor market friction with procyclical hiring costs; and (vi) Leontief production function with labor-saving technology shocks. In terms of model posterior probabilities, impulse responses, and autocorrelations, the model favored is the one that exhibits habit formation in consumption and investment adjustment costs. A robustness test shows that the sticky price model becomes as competitive as the habit formation and costly adjustment of investment model when sticky wages are included.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/211.

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    Length: 41
    Date of creation: 01 Aug 2012
    Date of revision:
    Handle: RePEc:imf:imfwpa:12/211
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    1. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What Happens After a Technology Shock?," NBER Working Papers 9819, National Bureau of Economic Research, Inc.
    2. Federico S. Mandelman & Francesco Zanetti, 2008. "Technology shocks, employment, and labor market frictions," Working Paper 2008-10, Federal Reserve Bank of Atlanta.
    3. Ambler, Steve & Guay, Alain & Phaneuf, Louis, 2012. "Endogenous business cycle propagation and the persistence problem: The role of labor-market frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 36(1), pages 47-62.
    4. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory 93-10, Federal Reserve Bank of San Francisco.
    5. Chetty, Nadarajan, 2012. "Bounds on Elasticities With Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply," Scholarly Articles 9748524, Harvard University Department of Economics.
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