Technology Shocks and Aggregate Fluctuations

Abstract

We report estimates of the dynamic effects of a technology shock, and then use these to estimate the parameters of a dynamic general equilibrium model with money. We find: (i) a positive technology shock drives up hours worked, consumption, investment and output; (ii) the positive response of hours worked reflects that the Fed has in practice accommodated technology shocks; (iii) model parameter values and functional forms that match the response of macroeconomic variables to monetary policy shocks also work well for technology shocks; (iv) while technology shocks account for a large fraction of the lower frequency component of economic fluctuations, they account for only a small part of the business cycle component of fluctuations. ∗Christiano and Eichenbaum are grateful for the financial support of a National Science Foundation grant to the National Bureau of Economic Research. We are grateful for helpful comments from Susanto Basu, Adrian Pagan, Valerie Ramey and Harald Uhlig. We particularly want to thank Eduard Pelz for excellent research assistance. This paper does not necessarily reflect the views of the Federal Reserve Bank of Chicago, the Federal Reserve Bank of Cleveland, or the Riksbank. †Federal Reserve Bank of Cleveland ‡Northwestern University, National Bureau of Economic Research, and Federal Reserve Banks of Chicago and Cleveland. §Northwestern University, National Bureau of Economic Research, and Federal Reserve Bank of Chicago. ¶Sverigse Riksbank