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Neville Francis
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Publisher: Journals Gateway
The Review of Economics and Statistics (2014) 96 (4): 638–647.
Published: 01 October 2014
Abstract
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Recent studies using long-run restrictions question the validity of the technology-driven real business cycle hypothesis. We propose an alternative identification that maximizes the contribution of technology shocks to the forecast-error variance of labor productivity at a long but finite horizon. In small-sample Monte Carlo experiments, our identification outperforms standard long-run restrictions by significantly reducing the bias in the short-run impulse responses and raising their estimation precision. Unlike its long-run restriction counterpart, when our Max Share identification technique is applied to U.S. data, it delivers the robust result that hours worked responds negatively to positive technology shocks.
Includes: Supplementary data