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Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations

  • Jordi Gali

Using data for the G7 countries, I estimate conditional correlations of employment and productivity, based on a decomposition of the two series into technology and non-technology components. The picture that emerges is hard to reconcile with the predictions of the standard Real Business Cycle model. For a majority of countries the following results stand out: (a) technology shocks appear to induce a negative comovement between productivity and employment, counterbalanced by a positive comovement generated by demand shocks, (b) the impulse responses show a persistent decline of employment in response to a positive technology shock, and (c) measured productivity increases temporarily in response to a positive demand shock. More generally, the pattern of economic fluctuations attributed to technology shocks seems to be largely unrelated to major postwar cyclical episodes. A simple model with monopolistic competition, sticky prices, and variable effort is shown to be able to account for the empirical findings.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5721.

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Date of creation: Aug 1996
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Publication status: published as American Economic Review (March 1999): 249-271.
Handle: RePEc:nbr:nberwo:5721
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