Impact of Technological Shock on the Sierra Leone Economy: A Dynamic Stochastic General Equilibrium (DSGE) Approach

Abstract

The neoclassical growth model has emphasised the importance of technology shocks, which supposedly affect macroeconomic variables’ heterogeneously in a small open economy like Sierra Leone. Using a Bayesian DSGE methodology for a non-linear model, we found that investment-specific technological shock partly explains business cycle fluctuations in Sierra Leone. Moreover, the analysis indicates that technology shock on output, capital, and consumption is more persistent than that of interest rate. The key implication is that technological innovation is crucial for long-term steady-state growth in Sierra Leone. The results also partly confirm the neoclassical growth model prediction – that is, in the long run, productivity growth is driven only by technological progress. The model specified for this research is largely inward-looking, with a minimal role for the Bank of Sierra Leone to influence investment in technology-related investment directly. Despite this limitation and more so given the fact that the DSGE modelling concept is quite a new venture at the BSL, thoughts have been given to enhance the model’s future capabilities to incorporate both the monetary bloc and external blocs to fully assess the impact of technological shock’s transmission in the entire economy in future research.