Understanding the puzzling effects of technology shocks

Pengfei Wang and Yi Wen

No 2007-018, Working Papers from Federal Reserve Bank of St. Louis

Abstract: The research led by Gali (AER 1999) and Basu et al. (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? 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 contrary to the conclusions reached by the literature.

Keywords: Business cycles; Equilibrium (Economics) (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge, nep-mac and nep-tid
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