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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Are Technology Improvements Contractionary?
Susanto Basu, John G. Fernald, and Miles Kimball
1998-625  (September 1998)

Abstract:  Yes. We construct a measure of aggregate technology change, controlling for imperfect competition, varying utilization of capital and labor, and aggregation effects. On impact, when technology improves, input use falls sharply, and output may fall slightly. With a lag of several years, inputs return to normal and output rises strongly. These results are inconsistent with frictionless dynamic general equilibrium models, which generally predict that technology improvements are expansionary, with inputs and (especially) output rising immediately. However, the results are consistent with plausible sticky-price models, which predict the results we find: When technology improves, input use generally falls in the short run, and output itself may also fall.

Full paper (313 KB PDF) | Full paper (2423 KB Postscript)

Productivity, business cycles, sticky-price models

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