Are Technology Improvements Contractionary?
Yes. We construct a measure of aggregate technology change, controlling for varying utilization of capital and labor, non-constant returns and imperfect competition, and aggregation effects. On impact, when technology improves, input use and non-residential investment fall sharply. Output changes little. With a lag of several years, inputs and investment return to normal and output rises strongly. We discuss what models could be consistent with this evidence. For example, standard one-sector real-business-cycle models are not, since they generally predict that technology improvements are expansionary, with inputs and (especially) output rising immediately. However, the evidence is consistent with simple sticky-price models, which predict the results we find: When technology improves, input use and investment demand generally fall in the short run, and output itself may also fall.
Susanto Basu & John G. Fernald & Miles S. Kimball, 2006. "Are Technology Improvements Contractionary?," American Economic Review, American Economic Association, vol. 96(5), pages 1418-1448, December. citation courtesy of