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A Defense of RBC:Understanding the Puzzling Effects of Technology Shocks

  • Yi Wen

    (Federal Reserve Bank of St. Louis)

  • Pengfei Wang

    (Hong Kong University of Science & Technology)

The research led by Gali (AER 1999) and Basu et al. (AER 2006) raises two important questions regarding the validity of the RBC theory: (i) How important are technology shocks in explaining the business cycle? (ii) Do impulse responses to technology shocks found in the data reject the assumption of flexible prices? This paper argues that the conditional impulse responses of the U.S. economy to technology shocks are not grounds to reject the notion that technology shocks are the main driving force of the business cycle and the assumption of flexible prices, in contrary to the conclusions reached by the literature. Our paper also provides a new approach to deriving aggregate production functions and TFP.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 7.

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Date of creation: 2008
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Handle: RePEc:red:sed008:7
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  1. Jordi Galí & David López-Salido & Javier Vallés, 2000. "Technology Shocks and Monetary policy: Assessing the Fed's Performance," Banco de Espa�a Working Papers 0013, Banco de Espa�a.
  2. Susanto Basu & John G. Fernald, 1997. "Aggregate productivity and aggregate technology," International Finance Discussion Papers 593, Board of Governors of the Federal Reserve System (U.S.).
  3. Yongsung Chang & Jay H. Hong, 2005. "Do technological improvements in the manufacturing sector raise or lower employment?," Working Papers 05-5, Federal Reserve Bank of Philadelphia.
  4. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What happens after a technology shock?," International Finance Discussion Papers 768, Board of Governors of the Federal Reserve System (U.S.).
  5. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2007. "Assessing Structural VARs," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 1-106 National Bureau of Economic Research, Inc.
  6. Jordi Galí & Pau Rabanal, 2004. "Technology Shocks and Aggregate Fluctuations; How Well Does the RBC Model Fit Postwar U.S. Data?," IMF Working Papers 04/234, International Monetary Fund.
  7. Francis, Neville & Ramey, Valerie A., 2005. "Is the technology-driven real business cycle hypothesis dead? Shocks and aggregate fluctuations revisited," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1379-1399, November.
  8. Lagos, R., 2001. "A Model of TFP," Working Papers 01-08, C.V. Starr Center for Applied Economics, New York University.
  9. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
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