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Technology Shocks and UK Business Cycles

  • Hashmat Khan

    (Carleton University)

  • John Tsoukalas

    (Bank of England)

After a neutral technology shock, hours worked decline in a persistent manner in the UK. This response is robust to a variety of considerations in the recent literature: measures of labour input, level versus differenced hours in the VAR, small and large VARS, long- versus medium- run identification, and neutral versus investment-specific technology shocks. The UK economy, therefore, offers a unique perspective on the response of hours to technology shocks. The large negative correlation between labour productivity and hours is the source of this response. Models with nominal price stickiness, low substitutability between domestic and foreign consumption, and investment-specific shocks appear to be most plausible in interpreting the short-run effects of technology shocks. Quantitatively, however, technology shocks account for under 20% of the business cycle variation in hours and under 30% of business cycle variation in output. These findings suggest that technology shocks may play only a limited role in driving UK business cycles.

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Paper provided by EconWPA in its series Macroeconomics with number 0512006.

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Length: 54 pages
Date of creation: 12 Dec 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0512006
Note: Type of Document - pdf; pages: 54
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