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Towards Technology-News-Driven Business Cycles

Paola Di Casola and Spyridon Sichlimiris
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Paola Di Casola: Monetary Policy Department, Central Bank of Sweden

No 360, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: We identify an inflationary technology news shock as the leading source of business cycle variations for the postwar U.S. economy. This shock acts like a demand shock: it induces strong positive comovement in real quantities - GDP, consumption, investment - and weak positive comovement between real quantities and inflation, contrary to the view that anticipated technological innovations reduce inflation. The technology news shock became the predominant source of the business cycle from the 80’s. The reason is that anticipated improvements in future technology lead to improvements in financing conditions. The monetary policy response to these anticipations is contractionary in the short run, independently of the sample period. However, the response is more short-lived from the 80’s than before and with respect to other non-technology shocks. Finally, the inclusion of sentiment, uncertainty and TFP measurement error shocks does not affect the importance of the technology news shock.

Keywords: total factor productivity; business cycle; technology news shocks; demand shocks; financial sector transmission; monetary policy (search for similar items in EconPapers)
JEL-codes: E20 E31 E32 E44 E52 O33 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2018-11-01
New Economics Papers: this item is included in nep-mac
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