Contractionary Effects of Supply Shocks: Evidence and Theoretical Interpretation
37 Pages Posted: 6 Aug 2009
Date Written: August 6, 2009
The theoretical literature on business cycles predicts positive factor inputs responses to productivity shocks. In this work we argue that, once conditional correlations are taken into account, hours worked and investment decline temporarily following a positive technology shock. First, we provide evidence about this apparent puzzle employing weakly identified SVECMs. Second, we estimate a sticky price/wage DSGE model with firm-specific capital and we show that the Bayesian impulse responses are consistent with the SVECMs evidence.
Keywords: technology shocks, investment dynamics, vector error correction model, firm specific capital, Bayesian inference.
JEL Classification: E32, E22, C11
Suggested Citation: Suggested Citation