 Are neutral and investment-specific technology shocks correlated?European Economic Review, 2021, vol. 139, issue C Abstract: The joint behavior of Total Factor Productivity (TFP) and the Relative Price of Investment (RPI) in the data lead several authors to conclude that neutral technology shocks are positively correlated with investment-specific technology shocks, challenging the specification of standard macroeconomic models. This paper rejects the correlated-shocks hypothesis using both parametric and non-parametric methods and controlling for structural breaks. The data suggests moderately negative long-run covariation between the RPI and TFP constructed from chain-linked output, but the RPI is orthogonal to TFP in consumption units. These results are consistent with a simple two-sector model in which neutral technology shocks and investment-specific technology shocks are uncorrelated, while models with correlated shocks cannot account for the second result. I conclude that it is not necessary to adapt macro models to allow for correlated technology processes. Keywords: Total factor productivity; Relative price of investment; Neutral technology; Investment-specific technology; Long-run covariability; Structural VARs (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:139:y:2021:i:c:s0014292121001902 DOI: 10.1016/j.euroecorev.2021.103866 Access Statistics for this article European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer More articles in European Economic Review from Elsevier |
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