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Working Paper 2005-024E

"A Flexible Finite-Horizon Identification of Technology Shocks"
by Neville Francis, Michael T. Owyang, and Jennifer E. Roush

Recent studies using long-run restrictions question the validity of the technology-driven real business cycle hypothesis. We propose an alternative identification that maximizes the contribution of technology shocks to the forecast-error variance of labor productivity at a long, but infinite, horizon. In small-sample Monte Carlo experiments, our identification outperforms standard long-run restrictions by significantly reducing the bias in the short-run impulse responses and raising their estimation precision. When applied to the data, the hours response is shown to be sensitive to the contribution of non technology shocks to the variance of productivity at long horizons. We conclude that long-run restrictions aimed at isolating the effects of technology shocks on productivity beyond business cycle frequencies do not provide information sufficient to robustly predict short-run movements in labor hours.

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Category > Applied Econometrics
Category > Monetary Policy/Macroeconomics
Author > Michael T. Owyang
Research Papers and Publications: JEL Code > C32
Research Papers and Publications: JEL Code > C50
Research Papers and Publications: JEL Code > E32