Are Technology Improvements Contractionary?

Abstract

Yes. We construct a measure of aggregate technology change, controlling for imperfect competition, varying utilization of capital and labor, and aggregation effects. On impact, when technology improves, input use falls sharply, and output may fall slightly. With a lag of several years, inputs return to normal and output rises strongly. We discuss what models could be consistent with this evidence. For example, standard one-sector real-business-cycle models are not, since they generally predict that technology improvements are expansionary, with inputs and (especially) output rising immediately. However, the evidence is consistent with simple sticky-price models, which predict the results we find: When technology improves, input use generally falls in the short run, and output itself may also fall.

JEL Classification: D24, E32, E52, E22, E24, O47