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What Do Technology Shocks Do?

  • John Shea

The real business cycle literature has largely ignored the empirical question of what role technology shocks actually play in business cycles. The observed procyclicality of total factor productivity (TFP) does not prove that technology shocks are important to business cycles, since demand shocks could generate procyclical TFP due to increasing returns or other reasons. I address the role of technology by investigating the dynamic interactions of inputs, TFP and two observable indicators of technology shocks: R+D spending and patent applications. Using annual panel data on 19 US manufacturing industries from 1959 -1991, I find that favorable R+D or patent shocks tend to increase inputs, especially labor, in the short run, but to decrease inputs in the long run, while tilting the mix of inputs towards capital and nonproduction labor. Favorable technology shocks do not significantly increase measured TFP at any horizon, except for a subset of industries dominated by process innovations, suggesting that available price data do not capture productivity improvements due to product innovations. Technology shocks explain only a small fraction of input and TFP volatility at business cycle horizons.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6632.

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Date of creation: Jul 1998
Date of revision:
Publication status: published as NBER Macro Annual 1998, Bernanke, Ben and Julio Rotemberg, eds., Cambridge: MIT Press, pp. 275-310.
Handle: RePEc:nbr:nberwo:6632
Note: ME
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