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Understanding the Effects of Technology Shocks

Pengfei Wang () and Yi Wen ()

Review of Economic Dynamics, 2011, vol. 14, issue 4, 705-724

Abstract: The research led by Gali (AER 1999) and Basu, Fernald, and Kimball (AER 2006) raises two important questions regarding the validity of the RBC theory: (i) How important are technology shocks in explaining the business cycle? (ii) Do impulse responses to technology shocks found in the data reject the assumption of flexible prices? Using an RBC model, this paper argues that the conditional impulse responses of the U.S. economy to technology shocks are not grounds to reject the notion that technology shocks are the main driving force of the business cycle and the assumption of flexible prices, in contrast to the conclusions reached by the literature. (Copyright: Elsevier)

Keywords: RBC; Technology shocks; Aggregate production function; Entry and exit; Sticky prices; Demand rigidity; Business cycle (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1016/j.red.2010.03.004

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