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Interpreting the Hours-Technology time-varying relationship

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  • Cristiano Cantore
  • Filippo Ferroni
  • Miguel A León-Ledesma

Abstract

We investigate the time variation in the correlation between hours and technology shocks using a structural business cycle model. We propose an RBC model with a Constant Elasticity of Substitution (CES) production function that allows for capital- and labor-augmenting technology shocks. We estimate the model using US data with Bayesian techniques. In the full sample, we find (i) evidence in favor of a less than unitary elasticity of substitution (rejecting Cobb-Douglas) and (ii) a sizable role for capital augmenting shock for business cycles fluctuations. In rolling sub-samples, we document that the impact of technology shocks on hours worked varies over time and switches from negative to positive towards the end of the sample. We argue that this change is due to the increase in the elasticity of factor substitution. That is, labor and capital became less complementary throughout the sample inducing a change in the sign and size of the the response of hours. We conjecture that this change may have been induced by a change in the skill composition of the labor input.

Suggested Citation

  • Cristiano Cantore & Filippo Ferroni & Miguel A León-Ledesma, 2012. "Interpreting the Hours-Technology time-varying relationship," Studies in Economics 1201, School of Economics, University of Kent.
  • Handle: RePEc:ukc:ukcedp:1201
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    3. Cristiano Cantore & Paul Levine & Giovanni Melina, 2014. "A Fiscal Stimulus and Jobless Recovery," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(3), pages 669-701, July.

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    More about this item

    Keywords

    Real Business Cycles models; Constant Elasticity of Substitution production function; Hours worked dynamics;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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