SHOCKING STUFF: TECHNOLOGY, HOURS, AND FACTOR SUBSTITUTION

The response of hours to technology shocks is a key controversy in macroeconomics. We show that differences between RBC and NK models hinge on highly restrictive views of technology. We introduce CES production technologies and demonstrate that the response of hours depends on the factor-augmenting...

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Bibliographic Details
Published in:Journal of the European Economic Association 2014-02, Vol.12 (1), p.108-128
Main Authors: Cantore, Cristiano, McAdam, Peter, León-Ledesma, Miguel, Willman, Alpo
Format: Article
Language:English
Subjects:
Calibration
E23
E25
E32
Economic fluctuations
Economic models
Economic theory
Elasticity
Empirical research
Experimental methods
Income shares
Induced substructures
Labor economics
Macroeconomic modeling
Macroeconomics
Production functions
Risk assessment
Risk management
Stock shares
Studies
Technology
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Summary:The response of hours to technology shocks is a key controversy in macroeconomics. We show that differences between RBC and NK models hinge on highly restrictive views of technology. We introduce CES production technologies and demonstrate that the response of hours depends on the factor-augmenting nature of shocks and the capital–labor substitution elasticity in both models. We develop analytical expressions to establish the thresholds determining its sign. This opens new margins for shock identification combining theory and VAR evidence. We discuss how our models provide new robust restrictions for empirical work, especially using the labor income share.
ISSN:1542-4766
1542-4774
DOI:10.1111/jeea.12038