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Motivations

Motivations. Understanding the Effects of Technology Shocks in a Multi-Sector, Open Economy Model the input output matrix bringing trade into the heart of the input-output matrix terms of trade shocks as temporary “technology” shocks that can easily be negative.

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Motivations

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  1. Motivations • Understanding the Effects of Technology Shocks in a Multi-Sector, Open Economy Model • the input output matrix • bringing trade into the heart of the input-output matrix • terms of trade shocks as temporary “technology” shocks that can easily be negative. • Greenwood, Hercowitz and Krusell • Fisher • The Logic of Consumption Technology Neutrality

  2. Consumption Technology Neutrality • When a multiplicative technology shock affects only the production of nondurable consumption goods, with log utility, the stochastic process of the consumption goods technology A does not affect labor hours N, investment I, or an index of the resources devoted to producing consumption goods X.

  3. A Simple Social Planner’s Problem

  4. An Equivalent Problem

  5. Comments • Because ln(A) is an additively-separable term, any stochastic process for A has no effect on the optimal decision rules for N, X and I. • There is a weaker, but still important result for the more general King-Plosser-Rebelo case: if A follows a geometric random walk it has no effect on the optimal decision rules for N, X and I.

  6. Empirical Implications: Standard RBC Parameters • With the standard parametrizations of the utility function consumption technology shocks will have very different effects from investment technology shocks. • consumption technology shocks have no effect on labor hours or investment. • investment technology shocks have the same effect on albor hours and investment as pervasive technology shocks. • therefore, like pervasive technology shocks in standard RBC models, investment technology shocks should have a large effect on labor hours and investment.

  7. Empirical Implications: Low EIS and Permanent Tech Shocks • With permanent technology shocks and King-Plosser-Rebelo utility and relatively low elasticity of intertemporal substitution (≈.3), investment technology shocks also have very little immediate effects on labor hours, though they do raise investment in a way that consumption technology shocks do not.

  8. A More General Question • At a minimum, the example of consumption technology neutrality raises the possibility that different types of technology shocks may have significantly different effects not only on relative prices, but also on aggregate labor hours and investment. • Therefore, we would like to construct technology shocks for goods of different levels of durability to see empirically if these have different effects.

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