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IMPERFECT TRANSMISSION OF TECHNOLOGY SHOCKS AND THE BUSINESS CYCLE CONSEQUENCES

Published online by Cambridge University Press:  14 December 2012

Hamilton B. Fout  and
Neville R. Francis
Hamilton B. Fout*
Affiliation:
Federal National Mortgage Association and Kansas State University
Neville R. Francis
Affiliation:
University of North Carolina
*
Address correspondence to: Hamilton B. Fout, Federal National Mortgage Association (Fannie Mae), 3900 Wisconsin Avenue, Washington, DC 20016, USA; e-mail: hamfout@gmail.com.
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Abstract

We investigate the business cycle effects of imperfect transmission of technology shocks within a basic real business cycle (RBC) model along two dimensions. First, we assume that agents cannot distinguish a temporary increase in productivity growth from a sustained increase in the underlying growth rate of productivity and instead must conduct signal extraction exercises and update beliefs about the source of aggregated shocks. Second, we propose a technology adjustment cost resulting in the slow diffusion of technological innovations into the production process. Both of these impediments to the transmission of technology result in a large initial wealth effect, increasing investment and hours less, relative to the usual RBC model without these frictions. Furthermore, each of these features is capable of producing a decline in hours on impact of the technology shock matching the negative response in hours found in the data by such works as Gali [American Economic Review 89(1), 249–271 (1999)].

Keywords

Technology ShocksLearningKalman FilterImpulse Responses
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 2 , March 2014 , pp. 418 - 437
Copyright
Copyright © Cambridge University Press 2012 

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