Positive Technology Shock Research Articles

Are Technology Shocks More Expansionary at the ZLB?

AbstractGarín et al.’s (2019) empirical study shows that a positive technology shock is more expansionary when the ZLB binds than when it does not. This cannot be explained by a basic new-Keynesian model with sticky prices. In this paper, I resolve this puzzle by extending the model to include wage stickiness. (JEL codes: E32, E52, E62, N12)

A new Keynesian model with unemployment: The effect of on‐the‐job search

AbstractAlthough new Keynesian models with labor market frictions report an increase in unemployment and a decrease in labor market tightness in response to a positive technology shock, which appears to be in line with recent empirical findings, the volatilities of these variables are not as high as their empirical counterparts. This calls for the introduction of new modeling tools to amplify the volatilities of the unemployment rate and labor market tightness. Along this line, this paper contributes to the theoretical literature by studying the effect of employment‐to‐employment flow in a new Keynesian model with labor market frictions. We consider two types of firms that offer different wage levels, which incentivize low‐paid agents to search on the job. Differently from the existing literature, the main source of wage dispersion is the difference between firms' bargaining powers. The proposed model generates a higher volatility of unemployment and labor market tightness in response to a positive technology shock compared to the model without on‐the‐job search, without causing a significant change in the responses of other variables.

Heterogeneity and Aggregate Fluctuations

We develop a state-space model with a state-transition equation that takes the form of a functional vector autoregression and stacks macroeconomic aggregates and a cross-sectional density. The measurement equation captures the error in estimating log densities from repeated cross-sectional samples. The log densities and the transition kernels in the law of motion of the states are approximated by sieves, which leads to a finite-dimensional representation in terms of macroeconomic aggregates and sieve coefficents. We use this model to study the joint dynamics of technology shocks, per capita GDP, employment rates, and the earnings distribution. We find that the estimated spillovers between aggregate and distributional dynamics are generally small, a positive technology shock tends to decrease inequality, and a shock that raises the inequality of earnings leads to a small but not significant increase in GDP.

Equity Home Bias When Firms are Indebted

We reassess one of the major puzzles in international macroeconomics, namely the equity home bias puzzle, to shed some light on how it is affected by financial leverage. As corporate debt is generally key to employment, the analysis can provide interesting insights to the mooted argument according to which equity home bias stems from agents’ attempt to insure against changes in their labor income. In a panel of advanced economies spanning the period 1980 through 2018, we find that the non-financial corporate credit-to-GDP ratio is negatively correlated with a standard equity home bias index. The former has increased over time while the latter has decreased, so we attempt to rationalize the data with a two-country, two-good model where firms face borrowing constraints and these constraints reduce agents’ appetite for domestic equities. We show that this happens because the borrowing constraints hinder employment after positive technology shocks, especially those hitting investment. After examining this result with a tractable framework, we find that it can also be true in an extended model, adding financial shocks, trade in bonds and non-unitary elasticity of substitution between goods.

The Importance of Hiring Frictions in Business Cycles

The paper shows that there is an important direct role for hiring frictions in business cycles. This runs counter to key models in several strands of the macroeconomic literature, which imply that hiring frictions are not important per-se. In our model, conventional shocks yield non-standard and non-obvious macroeconomic outcomes in the presence of hiring frictions. Specifically, hiring frictions operate to offset, and possibly reverse, the effects of price frictions. This confluence of frictions has substantial effects. For a sub-set of the parameter space, model outcomes appear “frictionless,” though both hiring frictions and price frictions are at play. For a different sub-space, these interactions between the two frictions generate amplification in the responses of employment and unemployment to technology shocks, rather than friction-induced mitigation of responses. Despite the presence of price rigidity, positive technology shocks may still be expansionary in employment, and the effects of monetary policy shocks may still be negligible. We explain the underlying economic mechanisms and show their empirical implementation. In doing so, we argue in favor of the importance of explicitly using hiring frictions in business cycle modelling.

Artificial Intelligence, Income Distribution and Economic Growth

The economic impact of Articial Intelligence (AI) is studied using a (semi) endogenous growth model with two novel features. First, the task approach from labor economics is reformulated and integrated into a growth model. Second, the standard representative household assumption is rejected, so that aggregate demand restrictions can be introduced. With these novel features it is shown that (i) AI automation can decrease the share of labor income no matter the size of the elasticity of substitution between AI and labor, and (ii) when this elasticity is high, AI will unambiguously reduce aggregate demand and slow down GDP growth, even in the face of the positive technology shock that AI entails. If the elasticity of substitution is low, then GDP, productivity and wage growth may however still slow down, because the economy will then fail to benefit from the supply-side driven capacity expansion potential that AI can deliver. The model can thus explain why advanced countries tend to experience, despite much AI hype, the simultaneous existence of rather high employment with stagnating wages, productivity, and GDP.

TECHNOLOGY SHOCKS AND HOURS WORKED: A CROSS-COUNTRY ANALYSIS

We reassess the evidence for (or against) a key implication of the basic real business cycle model: that aggregate hours worked increase in response to a positive technology shock. Two novel aspects are the scope (14 OECD countries) and the inclusion of data on both labor supply margins to analyze the key margin of adjustment in aggregate hours. The short-run response of aggregate hours to a positive technology shock is remarkably similar across countries, with an impact fall in 13 out of 14 countries. In contrast, its decomposition into intensive and extensive labor supply margins reveals substantial heterogeneity in labor market dynamics across OECD countries. For instance, movements in the intensive margin are the dominant channel of adjustment in aggregate hours in 6 out of 14 countries of our sample, including France and Japan.

Macroeconomic Regimes, Technological Shocks and Employment Dynamics

AbstractThe debate about the impact of technology on employment has always had a central role in economic theory. At the same time, the nexus of technological progress and employment might depend on macroeconomic regimes. In this work we investigate the interrelations among technology, output and employment in the U.S. economy in growth recessions vs. growth expansions. More precisely, using U.S. data we estimate different threshold vector autoregressions (TVARs) with TFP, hours, and GDP, employing the latter as threshold variable, and assess the generalized impulse responses of GDP and hours as to TFP shocks. For our entire period of observation, 1957Q1–2011Q4, positive technology shocks, while spurring GDP growth, by and large, display a negative effect on hours worked in growth recessions, but they are not significantly different from zero in good times. Yet, since the mid eighties (1984Q1–2011Q4) productivity shocks increase hours worked in low growth periods. The results are mainly driven by the response of labor along the extensive margin (number of employees), and remain persistent so in the face of a battery of robustness checks.

Is the empirical relationship between hours and productivity effected by corporate profits?

This paper studies the behaviour of hours-worked in the event of positive technology shock first in the closed economy DSGE model and second by adding a corporate profits in a bivariate SVAR model. Our analytical results show that in the presence of sticky prices, hours decrease in the event of a shock. However, in case of flexible prices or when central bank systematically respond to technology shocks, hours increase. Results based on SVAR model show that the inclusion of profits change the result of Gali (1999) by showing that hours increase at the aggregate level. However, sectoral analysis reveals different picture. Out of four only one sector is consistent with aggregate findings.

Identifying Global and National Output and Fiscal Policy Shocks Using a GVAR

The paper contributes to the growing global VAR (GVAR) literature by showing how global and national shocks can be identified within a GVAR framework. The usefulness of the proposed approach is illustrated in an application to the analysis of the interactions between public debt and real output growth in a multicountry setting, and the results are compared to those obtained from standard single country VAR analysis. We find that on average (across countries) global shocks explain about one third of the long-horizon forecast error variance of output growth, and about one fifth of the long run variance of the rate of change of debt-to-GDP. Evidence on the degree of cross-sectional dependence in these variables and their innovations are exploited to identify the global shocks, and priors are used to identify the national shocks within a Bayesian framework. It is found that posterior median debt elasticity with respect to output is much larger when the rise in output is due to a fiscal policy shock, as compared to when the rise in output is due to a positive technology shock. The cross country average of the median debt elasticity is 1.58 when the rise in output is due to a fiscal expansion as compared to 0.75 when the rise in output follows from a favorable output shock.

Identifying Global and National Output and Fiscal Policy Shocks Using a Gvar

The paper contributes to the growing global VAR (GVAR) literature by showing how global and national shocks can be identified within a GVAR framework. The usefulness of the proposed approach is illustrated in an application to the analysis of the interactions between public debt and real output growth in a multicountry setting, and the results are compared to those obtained from standard single country VAR analysis. We find that on average (across countries) global shocks explain about one third of the long-horizon forecast error variance of output growth, and about one fifth of the long run variance of the rate of change of debt-to-GDP. Evidence on the degree of cross-sectional dependence in these variables and their innovations are exploited to identify the global shocks, and priors are used to identify the national shocks within a Bayesian framework. It is found that posterior median debt elasticity with respect to output is much larger when the rise in output is due to a fiscal policy shock, as compared to when the rise in output is due to a positive technology shock. The cross country average of the median debt elasticity is 1.58 when the rise in output is due to a fiscal expansion as compared to 0.75 when the rise in output follows from a favorable output shock.

Identifying Global and National Output and Fiscal Policy Shocks Using a GVAR

This chapter contributes to the growing global VAR (GVAR) literature by showing how global and national shocks can be identified within a GVAR framework. The usefulness of the proposed approach is illustrated in an application to the analysis of the interactions between public debt and real output growth in a multicountry setting, and the results are compared to those obtained from standard single country VAR analysis. We find that on average (across countries) global shocks explain about one-third of the long-horizon forecast error variance of output growth, and about one-fifth of the long-run variance of the rate of change of debt-to-GDP. Evidence on the degree of cross-sectional dependence in these variables and their innovations are exploited to identify the global shocks, and priors are used to identify the national shocks within a Bayesian framework. It is found that posterior median debt elasticity with respect to output is much larger when the rise in output is due to a fiscal policy shock, as compared to when the rise in output is due to a positive technology shock. The cross-country average of the median debt elasticity is 1.45 when the rise in output is due to a fiscal expansion as compared to 0.76 when the rise in output follows from a favorable output shock.

Sources of fluctuations in hours worked for Canada, Germany, Japan and the U.S.: a sign restriction VAR approach

ABSTRACTThis study empirically examines the sources of fluctuations in hours worked in Canada, Germany, Japan and the U.S. It is particularly motivated by Galí’s (1999) VAR study, which demonstrates that a positive technology shock reduces hours worked, at least in the short run. However, in the present study, a technology shock is identified without recourse to Galí’s long-run restriction, which has been subject to active controversy. Furthermore, this study uncovers other important sources of fluctuations in hours worked to reflect the concern, raised by numerous studies, that technology shocks leave most variations in hours worked unexplained. Specifically, there are six shocks underlying our model, and they are identified using a set of sign restrictions. The empirical results confirm that in all four countries, a positive technology shock significantly reduces hours worked. This technology shock, along with labor supply and demand shocks, accounts for most of the short-term variations in hours worked. As the forecasting horizon increases, technology and demand shocks become less important, whereas labor supply shocks contribute to explaining the bulk of long-run variations in hours worked. Finally, the empirical relevance of Galí’s long-run identification restriction is tested and the results are related to those obtained using the sign restriction model.

Technology shocks and hours revisited: Evidence from household data

I exploit heterogeneous impulse responses at the household level due to limited stock market participation to provide novel evidence on the degree of nominal rigidities. A number of studies show that positive technology shocks reduce aggregate hours. The finding is often interpreted as evidence in favor of sticky prices. Using the Consumer Expenditure Survey, I show that, while non-stockholders reduce hours in response to a positive technology shock, stockholders increase them. Aggregate hours fall because most households are non-stockholders. This finding is inconsistent with models featuring a high degree of nominal rigidities.

The Cyclical Behavior of Labor Force Participation

We document that labor force participation declines in the short run following a positive technology shock. The countercyclical response of labor force participation to a technology shock contrasts with the well documented mild procyclical behavior of labor force participation in the business cycle. In a search model of the labor market that incorporates a participation choice, we show that a positive technology shock reduces labor force participation in the short run under a reasonable calibration. In the calibrated model, discount factor shocks induce a procyclical response of labor force participation. As a result, the model can generate both the countercyclical response to technology shocks and the procyclical behavior, consistent with the evidence. Our results indicate an important role of nontechnology shocks for explaining labor market fluctuations.

A real-business-cycle model with pollution and environmental taxation: the case of Bulgaria

ABSTRACTWe introduce an environmental dimension into a real-business-cycle model augmented with a detailed government sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999–2016). We investigate the quantitative importance of utility-enhancing environmental quality, and the mechanics of an ‘environmental’ output tax levied on the polluting firm's output, as well as the effect of government spending on pollution abatement over the cycle. In particular, a positive shock to pollution emission in the model works like a positive technological shock, but its effect is quantitatively very small. Overall, the model performs relatively well when evaluated against data, but less so along the environmental dimension, so more research is needed to understand the aggregate effects of pollution.

The Cyclical Behavior of Labor Force Participation

We document that labor force participation declines in the short run following a positive technology shock. The countercyclical response of labor force participation to a technology shock contrasts with the well documented mild procyclical behavior of labor force participation in the business cycle. In a search model of the labor market that incorporates a participation choice, we show that a positive technology shock reduces labor force participation in the short run under a reasonable calibration. In the calibrated model, discount factor shocks induce a procyclical response of labor force participation. As a result, the model can generate both the countercyclical response to technology shocks and the procyclical behavior, consistent with the evidence. Our results indicate an important role of nontechnology shocks for explaining labor market fluctuations.

An estimated DSGE model with search and matching frictions in the credit market

Financial frictions have become fundamental for studying the business cycle and credit market dynamics. This work adds to the existing literature by introducing a search and matching scheme in the financial market into a cash in advance New Keynesian DSGE theoretical model. We provide an alternative explanation of the degree of incompleteness in the pass-through from policy rate to loan rates depending on credit market tightness, the search costs sustained by banks, and the relative powers of the agents in loan interest rate bargaining. The model is able to reproduce the countercyclical behaviour of the credit spread with respect to a positive technology shock. It also proposes a scenario in which a credit shock hits the economy. The model is estimated by using the Bayesian procedures.

An Estimated DSGE Model with Search and Matching Frictions in the Credit Market

Financial frictions have become fundamental for studying the business cycle and credit market dynamics. This work adds to the existing literature by introducing a search and matching scheme in the financial market into a cash in advance New Keynesian DSGE theoretical model. We provide an alternative explanation of the degree of incompleteness in the pass-through from policy rate to loan rates depending on credit market tightness, the search costs sustained by banks, and the relative powers of the agents in loan interest rate bargaining. The model is able to reproduce the countercyclical behaviour of the credit spread with respect to a positive technology shock. It also proposes a scenario in which a credit shock hits the economy. The model is estimated by using the Bayesian procedures.

An Evolutionary Analysis of Growth and Fluctuations with Negative Externalities

We present an evolutionary game theoretic model of growth and fluctuations with negative externalities. Agents in a population choose the level of input. Total output is a function of aggregate input and a productivity parameter. The model, which is equivalent to a tragedy of the commons, constitutes an aggregative potential game with negative externalities. Aggregate input at the Nash equilibrium is inefficiently high causing aggregate payoff to be suboptimally low. Simulations with the logit dynamic reveal that while the aggregate input increases monotonically from an initial low level, aggregate payoff may decline from the corresponding high level. Hence, a positive technology shock causes a rapid initial increase in aggregate payoff, which is unsustainable as agents increase aggregate input to the inefficient equilibrium level. Aggregate payoff, therefore, declines subsequently. A sequence of exogenous shocks, therefore, generates a sustained pattern of growth and fluctuations in aggregate payoff.