A Flexible Finite-Horizon Alternative to Long-Run Restrictions with an Application to Technology Shocks
Federal Reserve Bank of St. Louis Working Paper No. 2005-024G
27 Pages Posted: 19 Jul 2008 Last revised: 11 Jul 2012
Date Written: December 24, 2010
Recent studies using long-run restrictions question the validity of the technology-driven real business cycle hypothesis. We propose an alternative identification that maximizes the contribution of technology shocks to the forecast-error variance of labor productivity at a long, but finite, horizon. In small-sample Monte Carlo experiments, our identification outperforms standard long-run restrictions by significantly reducing the bias in the short-run impulse responses and raising their estimation precision. Unlike its long-run restriction counterpart, when our Max Share identification technique is applied to U.S. data it delivers the robust result that hours worked responds negatively to positive technology shocks.
Keywords: productivity, structural VAR, long-run restrictions
JEL Classification: C32, C50, E32
Suggested Citation: Suggested Citation