Technology Shocks, Statistical Models, and The Great Moderation

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper we compare the cyclical features implied by an RBC model with two technology shocks under several statistical specifications for the stochastic processes governing technological change. We conclude that while a trend-stationary model accounts better for the observed volatilities, a difference-stationary model does a relatively better job of accounting for the correlation of the variables of interest with output. We also explore some counterfactuals to assess the ability of our model to replicate the volatility slowdown of the mid 1980s. First, we conclude that the stochastic growth model outperforms the deterministic growth model in accounting for the Great Moderation. Finally, we obtain that even though the neutral technology shock is the main driving force in the volatility slowdown, allowing for a larger financial flexibility in the form of a smaller volatility for the investment-specific innovation improves the ability of our model to account for the magnitude of the Great Moderation.

Keywords: Business Cycle; Aggregate fluctuations; Technology Shocks; Unit Roots (search for similar items in EconPapers)
JEL-codes: C32 E32 O30 (search for similar items in EconPapers)
Date: 2007-06-01
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:3589

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