Business cycle non-linearities and productivity shocks

Paolo Piselli

No 516, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: The recent empirical evidence documenting the presence of asymmetries in business cycles represents a challenge for the standard equilibrium models of real business cycle. These models successfully explain most first and second moments of the actual time series, but cannot replicate non-linear features of the data, unless a non-linear innovation is introduced. This paper aims at investigating the possible non-linearity in the technology shock, the basic innovation in Real Business Cycle models. In order to measure the unobservable technology shock, we derive some alternative measures of total factor productivity such as revenue-based and cost-based Solow residual and we also control for cyclical factor utilisation. We test for non-linearities and model a nonlinear SETAR model for the productivity shock as a natural extension of the autoregressive linear process, the standard way of representing technology shocks. Our findings suggest that, although the standard Solow residual turns out to be linear, the other measures of technology shock appear non-linear, as soon as non-technological cyclical components are ruled out.

Keywords: Solow residual; technology shock; non-linear models; linearity test (search for similar items in EconPapers)
JEL-codes: C22 C52 E32 (search for similar items in EconPapers)
Date: 2004-07
New Economics Papers: this item is included in nep-dge, nep-eff and nep-mac
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_516_04

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