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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

Neville Francis

University of North Carolina (UNC) at Chapel Hill - Department of Economics

Michael Owyang

Federal Reserve Bank of St. Louis - Research Division

Jennifer E. Roush

Federal Reserve Board - Division of Monetary Affairs

Riccardo DiCecio

Federal Reserve Bank of St. Louis - Research Division

Date Written: December 24, 2010

Abstract

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

Francis, Neville and Owyang, Michael and Roush, Jennifer E. and DiCecio, Riccardo, A Flexible Finite-Horizon Alternative to Long-Run Restrictions with an Application to Technology Shocks (December 24, 2010). Federal Reserve Bank of St. Louis Working Paper No. 2005-024G. Available at SSRN: https://ssrn.com/abstract=1162927 or http://dx.doi.org/10.2139/ssrn.1162927

Neville Francis

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

Michael T. Owyang (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

Jennifer E. Roush

Federal Reserve Board - Division of Monetary Affairs ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2897 (Phone)
202-263-4850 (Fax)

Riccardo DiCecio

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

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