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The Response of Hours to a Technology Shock: A Two‐Step Structural VAR Approach
Author(s) -
FÈVE PATRICK,
GUAY ALAIN
Publication year - 2009
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2009.00241.x
Subject(s) - dynamic stochastic general equilibrium , technology shock , shock (circulatory) , econometrics , simple (philosophy) , computer science , economics , monetary policy , macroeconomics , medicine , philosophy , epistemology
The response of hours to a technology shock is a controversial issue in macroeconomics. Part of the difficulty lies in that the estimated response is sensitive to the specification of hours in structural vector autoregressions (SVARs). This paper uses a simple two‐step approach to consistently estimate the response of hours. The first step considers a SVAR model with a relevant stationary variable, but excluding hours. Given a consistent estimate of technology shocks in the first step, the response of hours to this shock is estimated in a second step. Simulation experiments from an estimated dynamic stochastic general equilibrium (DSGE) model show that this approach outperforms standard SVARs. When applied to U.S. data, the two‐step approach predicts a short‐run decrease followed by a hump‐shaped positive response. This result is robust to other specifications and data.