Technology Shocks in a Two-Sector DSGE Model

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.