What (Really) Accounts for the Fall in Hours After a Technology Shock?

Nooman Rebei

No 2012/211, IMF Working Papers from International Monetary Fund

Abstract: The paper asks how state of the art DSGE models that account for the conditional response of hours following a positive neutral technology shock compare in a marginal likelihood race. To that end we construct and estimate several competing small-scale DSGE models that extend the standard real business cycle model. In particular, we identify from the literature six different hypotheses that generate the empirically observed decline in worked hours after a positive technology shock. These models alternatively exhibit (i) sticky prices; (ii) firm entry and exit with time to build; (iii) habit in consumption and costly adjustment of investment; (iv) persistence in the permanent technology shocks; (v) labor market friction with procyclical hiring costs; and (vi) Leontief production function with labor-saving technology shocks. In terms of model posterior probabilities, impulse responses, and autocorrelations, the model favored is the one that exhibits habit formation in consumption and investment adjustment costs. A robustness test shows that the sticky price model becomes as competitive as the habit formation and costly adjustment of investment model when sticky wages are included.

Keywords: WP; production function; standard deviation; Sticky prices; Firm entry and exit; Habit in consumption; Labor market frictions; Permanent technology shocks; Leontief production; Bayesian estimation.; impulse-response function; productivity shock; labor friction model; technology shock; RBC model; adjustment cost; HC model; Real wages; Structural vector autoregression (search for similar items in EconPapers)
Pages: 41
Date: 2012-08-01
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Journal Article: What (really) accounts for the fall in hours after a technology shock? (2014)
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