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Technology Shocks in a Two-Sector DSGE Model


  • Zheng Liu

    (Federal Reserve Bank of San Francisco)

  • John Fernald

    (Federal Reserve Bank of San Francisco)

  • Susanto Basu

    (Boston College)


Recent evidence suggests that output, consumption, investment and hours rise in response to improvements in the technology for producing consumption goods, but all decline on impact when there is a similar improvement in investment-goods technology. We show that these effects are consistent with the predictions of a dynamic stochastic general equilibrium (DSGE) model with two sectors---a consumption good sector and an investment good sector---with sticky prices in each sector. The assumption that investment goods prices are also costly to adjust differentiates our model from previous research in this area, and helps us fit the evidence that the relative price of investment goods adjusts slowly to shocks. In combination with recent empirical work, our paper suggests that sector-specific technology shocks may be a major source of US business cycle dynamics, and models that were developed to fit the estimated effects of monetary policy shocks can also explain the estimated effects of sector-specific technology shocks.

Suggested Citation

  • Zheng Liu & John Fernald & Susanto Basu, 2012. "Technology Shocks in a Two-Sector DSGE Model," 2012 Meeting Papers 1017, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:1017

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    References listed on IDEAS

    1. Alejandro Justiniano & Giorgio Primiceri & Andrea Tambalotti, 2011. "Investment Shocks and the Relative Price of Investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 101-121, January.
    2. Zheng Liu & Daniel F. Waggoner & Tao Zha, 2011. "Sources of macroeconomic fluctuations: A regime‚Äźswitching DSGE approach," Quantitative Economics, Econometric Society, vol. 2(2), pages 251-301, July.
    3. 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.
    4. Michael Keane & Richard Rogerson, 2015. "Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 89-117, August.
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    Cited by:

    1. Lunsford, Kurt Graden, 2015. "Identifying Structural VARs with a Proxy Variable and a Test for a Weak Proxy," Working Papers (Old Series) 1528, Federal Reserve Bank of Cleveland.

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