Technology and Non-Technology Shocks in a Two-Sector Economy

Abstract

This paper presents an empirically testable two-sector dynamic general equilibrium model for the United States economy that admits technology and non-technology shocks. Long-run identification restrictions further distinguish the impact of each shocks over the originating sector (i.e. as a sector-specific), and over other sectors different from the originating one (i.e. as a cross-sector shock), also exploring the shocks transmission mechanism across sectors. There are three main results. First, business cycle are mainly generated, in each sector, by technology shocks (mainly described by sector-specific shocks), but they are transmitted across sectors along the sectors' demand side, i.e. passing through non-technology shocks. Second, technology and non-technology shocks almost equally share the responsibility of fluctuations in the aggregate manufacturing sector. Third, the dynamic behavior of the durable good sector may be well represented by a standard Real Business Model; the non-durable good sector, on the other hand, would not be consistent with that predictions. Overall, due to a size effect, the aggregate dynamics is driven by the relatively larger sector, which is the non-durable good one.