Revisiting the effect of a technology shock on hours

Abstract

A number of studies demonstrate that a positive technology shock leads to a short-run decline in hours (employment). This paper shows that a standard flexible price model can deliver the negative response of hours to the technology shock when hyperbolic discounting is incorporated into the model. This paper also finds that the model can produce similar dynamic responses of key macroeconomic aggregates to those corroborated by previous empirical studies.