What Do Technology Shocks Do?

John Shea

NBER Working Paper No. 6632
Issued in July 1998
NBER Program(s):The Monetary Economics Program

The real business cycle literature has largely ignored the empirical question of what role technology shocks actually play in business cycles. The observed procyclicality of total factor productivity (TFP) does not prove that technology shocks are important to business cycles, since demand shocks could generate procyclical TFP due to increasing returns or other reasons. I address the role of technology by investigating the dynamic interactions of inputs, TFP and two observable indicators of technology shocks: R+D spending and patent applications. Using annual panel data on 19 US manufacturing industries from 1959 -1991, I find that favorable R+D or patent shocks tend to increase inputs, especially labor, in the short run, but to decrease inputs in the long run, while tilting the mix of inputs towards capital and nonproduction labor. Favorable technology shocks do not significantly increase measured TFP at any horizon, except for a subset of industries dominated by process innovations, suggesting that available price data do not capture productivity improvements due to product innovations. Technology shocks explain only a small fraction of input and TFP volatility at business cycle horizons.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w6632

Published:

• NBER Macro Annual 1998, Bernanke, Ben and Julio Rotemberg, eds., Cambridge: MIT Press, pp. 275-310.
• What Do Technology Shocks Do?, John Shea. in NBER Macroeconomics Annual 1998, volume 13, Bernanke and Rotemberg. 1999

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