Investment-specific Technology Research Articles

Investment Shocks and the Relative Price of Investment

We estimate a New-Neoclassical Synthesis model of the business cycle with two investment shocks. The first, an investment-specific technology shock, affects the transformation of consumption into investment goods and is identified with the relative price of investment. The second shock affects the production of installed capital from investment goods or, more broadly, the transformation of savings into future capital input. We find that this shock is the most important driver of U.S. business cycle fluctuations in the postwar period and that it is likely to proxy for more fundamental disturbances to the functioning of the financial sector. To corroborate this interpretation, we show that the shock correlates strongly with interest rate spreads and that it played a particularly important role in the recession of 2008.

Econometric analysis of structural systems with permanent and transitory shocks

This paper considers the implications of the permanent/transitory decomposition of shocks for identification of structural models in the general case where the model might contain more than one permanent structural shock. It provides a simple and intuitive generalization of the influential work of Blanchard and Quah [1989. The dynamic effects of aggregate demand and supply disturbances. The American Economic Review 79, 655–673] , and shows that structural equations with known permanent shocks cannot contain error correction terms, thereby freeing up the latter to be used as instruments in estimating their parameters. The approach is illustrated by a re-examination of the identification schemes used by Wickens and Motto [2001. Estimating shocks and impulse response functions. Journal of Applied Econometrics 16, 371–387], Shapiro and Watson [1988. Sources of business cycle fluctuations. NBER Macroeconomics Annual 3, 111–148], King et al. [1991. Stochastic trends and economic fluctuations. American Economic Review 81, 819–840] , Gali [1992. How well does the ISLM model fit postwar US data? Quarterly Journal of Economics 107, 709–735; 1999. Technology, employment, and the business cycle: Do technology shocks explain aggregate fluctuations? American Economic Review 89, 249–271] and Fisher [2006. The dynamic effects of neutral and investment-specific technology shocks. Journal of Political Economy 114, 413–451].

On the Robust Effects of Technology Shocks on Hours Worked and Output

We analyze the effects of neutral and investment-specific technology shocks on hours worked and output. Low frequency movements in hours are captured in a variety of ways. Hours robustly fall in response to neutral shocks and robustly increase in response to investment specific shocks. The percentage of the variance of hours (output) explained by neutral shocks is small (large); the opposite is true for investment specific shocks. News shocks and other shocks are uncorrelated with the estimated neutral and investment specific shocks.

Labor Market Effects of Technology Shocks

We analyze the effects of neutral and investment-specific technology shocks on hours worked and unemployment. We characterize the response of unemployment in terms of job separation and job finding rates. We find that job separation rates mainly account for the impact response of unemployment while job finding rates for movements along its adjustment path. Neutral shocks increase unemployment and explain a substantial portion of unemployment and output volatility; investment-specific shocks expand employment and hours worked and mostly contribute to hours worked volatility. We show that this evidence is consistent with the view that neutral technological progress prompts Schumpeterian creative destruction, while investment specific technological progress has standard neoclassical features.

US imbalances: The role of technology and policy

This paper investigates the role of three likely suspects in driving the steady deterioration of the US external balance: US technology developments, changes in the US government fiscal position and the Fed's monetary policy. Estimating several Vector Autoregressions on US data over the period 1982:2–2005:4 we identify five structural shocks: a multi-factor productivity shock; an investment-specific technology shock; a monetary policy shock; and a fiscal revenue and spending shock. Together these shocks can account for the deterioration and subsequent reversal of the trade balance in the 1980s. While productivity improvements and fiscal and monetary policy easing also play an important role in the rapid deterioration since 2000, these structural shocks cannot explain why the trade balance deteriorated in the second half of the 1990s.

US Imbalances: The Role of Technology and Policy

This paper investigates the role of three likely factors in driving the steady deterioration of the US external balance: US technology developments, changes in the US government fiscal position and the Fed’s monetary policy. Estimating several Vector Autoregressions on US data over the period 1982:2 to 2005:4 we identify five structural shocks: a multi-factor productivity shock; an investment-specific technology shock; a monetary policy shock; and a fiscal revenue and spending shock. Together these shocks can account for the deterioration and subsequent reversal of the trade balance in the 1980s. Productivity improvements and fiscal and monetary policy easing also play an important role in the increase of the external deficit since 2000, but these structural shocks can not explain why the trade balance deteriorated in the second half of the 1990s.

Determination of asset prices with an investment-specific technology model: Implications for the equity premium puzzle

We explore how the introduction of an investment-specific technology shock and capacity utilization into the dynamic asset-pricing model ‘improves’ the equity premium and Sharpe ratio. Using the method of undetermined coefficients, we show approximate closed-form analytical solutions for a variety of prices for financial assets. Our main empirical findings show that asset-pricing models with an investment-specific technology shock and capacity utilization perform better than a model with the standard productivity shock and adjustment costs in terms of mimicking the Sharpe ratio and risk premiums of a firm's equity and long-term government bonds. Furthermore, when we introduce habit formation as a special case in our model, the model improves further in terms of replicating the risk premiums of the real economy.

Investment-Specific Technology Shocks in a Small Open Economy

In this paper we examine the behavioral responses of key macroeconomic variables in Canada to exogenous innovations to investment specific technology. This is done by developing a stylized international real business cycle model which is simulated to explore its ability to shed new light on the dynamic behavior of the standard small open economy. The results indicate that this model can quantitatively replicate the key dynamic features of the post-war Canadian economy, and thus shocks to investment-specific technology can be considered an important propagation mechanism for studying and understanding modern macroeconomic dynamics in small open economies. Moreover, when the model was augmented with an endogenous utilization rate it was able to generate the counter-cyclical behavior of the external accounts - without appealing to an adjustment cost parameter and/or a propagation mechanism whose volatility and persistence are artificially low.

Changing Technology Trends, Transition Dynamics, and Growth Accounting

Abstract The technology growth trends that underlie recent productivity patterns are investigated in a framework that incorporates investment-specific technological progress. Structural-break tests and regime-shifting models reveal the presence of a downward shift in total factor productivity growth in the late 1960s and an upward shift in investment-specific technology growth in the mid-1980s. In both cases, these breaks precede the generally recognized dates of labor productivity growth shifts. Simulations of technology growth shocks in a basic neoclassical model show that induced patterns of capital accumulation are generally consistent with the observed lags between technological advances and changes in productivity growth.

The sources of total factor productivity growth: Evidence from Canadian data

A dynamic general equilibrium model is constructed and used to identify sources of total factor productivity growth in Canada and to quantify their importance. The model also provides procedures for constructing measures of technological progress. We find that periods of low productivity growth correspond to periods of high growth in investment-specific technology (IST) or high rates of technology embodiment. For example, the growth rate of IST was relatively high between 1974 and 1996. The higher growth rate of IST during this period should have increased the rate of productivity growth by an estimated 0.29 percentage points, ceteris paribus. Yet, productivity growth slowed. Why?

Investment-Specific Technology Growth: Concepts and Recent Estimates

The strength of the U.S. productivity growth in the recent years has been attributed to technological improvements that are, in some sense, embodies in new types of capital equipment. However, traditional growth theory and growth accounting techniques—which emphasize the role of disembodied, neutral technological progress—are deficient in explaining this phenomenon.

The role of investment-specific technological change in the business cycle

This is a quantitative investigation of the importance of technological change specific to new investment goods for postwar US aggregate fluctuations. A growth model that incorporates this form of technological change is calibrated to US data and simulated, using the relative price of new equipment to identify the process driving investment-specific technology shocks. The analysis suggests that this form of technological change is the source of about 30% of output fluctuations.

Total Productivity and the Quality of Capital

Previous articleNext article No AccessTotal Productivity and the Quality of CapitalEvsey D. DomarEvsey D. Domar Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Journal of Political Economy Volume 71, Number 6Dec., 1963 Article DOIhttps://doi.org/10.1086/258818 Views: 4Total views on this site Citations: 12Citations are reported from Crossref Copyright 1963 The University of ChicagoPDF download Crossref reports the following articles citing this article:Dulani Jayasuriya Daluwathumullagamge A Tale of Two Returns: Stock and Investment Returns with Investment Specific Technology Shocks, SSRN Electronic Journal (Jan 2019).https://doi.org/10.2139/ssrn.3352916Amit Sharma, Victor Eduardo Da Motta, Jeong-Gil Choi, Naomi S. Altman Economic production in hospitality and tourism industry, International Journal of Contemporary Hospitality Management 28, no.55 (May 2016): 1026–1050.https://doi.org/10.1108/IJCHM-07-2014-0316Neal Solomon Policy Solutions to the Productivity Growth Crisis, SSRN Electronic Journal (Jan 2016).https://doi.org/10.2139/ssrn.2867027Jeff Luckstead, Seung Mo Choi, Stephen Devadoss, Ron C. Mittelhammer China’s catch-up to the US economy: decomposing TFP through investment-specific technology and human capital, Applied Economics 46, no.3232 (Aug 2014): 3995–4007.https://doi.org/10.1080/00036846.2014.948677Boyan Jovanovic, Yuri Yatsenko Investment in vintage capital, Journal of Economic Theory 147, no.22 (Mar 2012): 551–569.https://doi.org/10.1016/j.jet.2010.10.017Boyan Jovanovic When should firms invest in old capital?, International Journal of Economic Theory 5, no.11 (Mar 2009): 107–123.https://doi.org/10.1111/j.1742-7363.2008.00096.xNicholas Oulton Investment-specific technological change and growth accounting, Journal of Monetary Economics 54, no.44 (May 2007): 1290–1299.https://doi.org/10.1016/j.jmoneco.2006.02.004Jeremy Greenwood, Per Krusell Growth accounting with investment-specific technological progress: A discussion of two approaches, Journal of Monetary Economics 54, no.44 (May 2007): 1300–1310.https://doi.org/10.1016/j.jmoneco.2006.02.008Nicholas Oulton Investment-Specific Technological Change and Growth Accounting, SSRN Electronic Journal (Jan 2004).https://doi.org/10.2139/ssrn.598885James Bessen Technology Adoption Costs and Productivity Growth: The Transition to Information Technology, Review of Economic Dynamics 5, no.22 (Apr 2002): 443–469.https://doi.org/10.1006/redy.2001.0152Sumit K. Majumdar Modularity and productivity, Technological Forecasting and Social Change 56, no.11 (Sep 1997): 61–75.https://doi.org/10.1016/S0040-1625(97)00023-1Charles Kennedy, A. P. Thirlwall Technical Progress, (Jan 1973): 115–176.https://doi.org/10.1007/978-1-349-01860-4_3