Skip to main content

Roles of Technology and Nontechnology Shocks in the Business Cycles

July 2006
Shingo Watanabe*

Click on wp06e11.pdf to download the full text.

Abstract

The empirical study of technology shocks is intensively conducted to evaluate plausibility of the technology-driven real business cycle hypothesis. A popular method is to identify technology shocks by the long-run restriction that those solely have permanent effects on labor productivity in the system consisting of labor productivity growth and hours worked. While it has an advantage of not using Solow residuals which tend to accompany measurement errors, it potentially misidentifies nontechnology shocks, which permanently affect capital-labor ratio such as a capital tax shock, as technology shocks. We show that such shock brings nonstationarity of nominal investment-output ratio and identify it through the additional restriction that it permanently affects real investment-output ratio. Data indicate that the shock works importantly in not U.S. but Japan. In the system for Japan with the shock added, hours worked responses to technology shocks become insignificant. Furthermore the technology shock loses the dominant role in Japan's lost decade. We also study an appropriate treatment of lower-frequency movements in Japan's hours worked due to inter-sectoral labor movements and working hours reductions.

JEL Classification: E10, E32

Key Words:
Business cycle; Technology shock

I am grateful to Richard A. Braun, Ippei Fujiwara, Masahiro Higo, Takeshi Kimura, Toshihiro Okada, Etsuro Shioji, Shigenori Shiratsuka, and the seminar participants at the Bank of Japan. The views expressed in this paper are the author's; they should not be attributed to the Bank of Japan.

  • Research and Statistics Department (currently, International Department)
    E-mail: shingo.watanabe@boj.or.jp

Notice

Papers in the Bank of Japan Working Paper Series are circulated in order to stimulate discussion and comments. Views expressed are those of authors and do not necessarily reflect those of the Bank.

If you have any comment or question on the working paper series, please contact each author.

When making a copy or reproduction of the content for commercial purposes, please contact the Public Relations Department (webmaster@info.boj.or.jp) at the Bank in advance to request permission. When making a copy or reproduction, the source, Bank of Japan Working Paper Series, should explicitly be credited.