Contractionary Effects of Supply Shocks: Evidence and Theoretical Interpretation

Abstract

The theoretical literature on business cycles predicts positive factor inputs responses to productivity shocks. In this work we argue that, once conditional correlations are taken into account, hours worked and investment decline temporarily following a positive technology shock. First, we provide evidence about this apparent puzzle employing weakly identified SVECMs. Second, we estimate a sticky price/wage DSGE model with firm-specific capital and we show that the Bayesian impulse responses are consistent with the SVECMs evidence.