A Flexible Finite-Horizon Identification of Technology Shocks

FRB International Finance Discussion Paper No. 832

FRB Bank of St. Louis Working Paper No. 2005-024D

39 Pages Posted: 25 Apr 2005

See all articles by Jennifer E. Roush

Jennifer E. Roush

Board of Governors of the Federal Reserve System

Neville Francis

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

Michael Owyang

Federal Reserve Bank of St. Louis - Research Division

Date Written: April 2007

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. When applied to the data, the hours response is shown to be sensitive to the contribution of non-technology shocks to the variance of productivity at long horizons. We conclude that long-run restrictions aimed at isolating the effects of technology shocks on productivity beyond business cycle frequencies do not provide information sufficient to robustly predict short-run movements in labor hours.

Keywords: Productivity, structural VAR, long-run restrictions

JEL Classification: C32, C50, E32

Suggested Citation

Roush, Jennifer E. and Francis, Neville and Owyang, Michael T., A Flexible Finite-Horizon Identification of Technology Shocks (April 2007). FRB International Finance Discussion Paper No. 832, FRB Bank of St. Louis Working Paper No. 2005-024D, Available at SSRN: https://ssrn.com/abstract=709150 or http://dx.doi.org/10.2139/ssrn.709150

Jennifer E. Roush (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2897 (Phone)
202-263-4850 (Fax)

Neville Francis

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

Chapel Hill, NC 27599
United States

Michael T. Owyang

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

411 Locust St
Saint Louis, MO 63011
United States

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