PROCYCLICAL SOLOW RESIDUALS WITHOUT TECHNOLOGY SHOCKS

Most real business cycle models have a hard time jointly explaining the twin facts of strongly procyclical Solow residuals and extremely low correlations between wages and hours. We present a model that delivers both these results without using exogenous variation in total factor productivity (techn...

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Bibliographic Details
Published inMacroeconomic dynamics Vol. 13; no. 3; pp. 366 - 389
Main Authors Clarke, Andrew J., Johri, Alok
Format Journal Article
LanguageEnglish
Published New York, USA Cambridge University Press 01.06.2009
Subjects
Business cycles
Decentralization
Economic models
Economic theory
Growth models
Labor productivity
Labor supply
Macroeconomics
Monopolistic competition
Organizational learning
Prices
Productivity
Studies
Technology
Volatility
Productivity
Learning-by-Doing
Business Cycles
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Summary:Most real business cycle models have a hard time jointly explaining the twin facts of strongly procyclical Solow residuals and extremely low correlations between wages and hours. We present a model that delivers both these results without using exogenous variation in total factor productivity (technology shocks). The key innovation of the paper is to add learning-by-doing to firms' technology. As a result, firms optimally vary their prices to control the amount of learning, which in turn influences future productivity. We show that exogenous variation in labor wedges (preference shocks) measured from aggregate data deliver around 50% of the standard deviation in the efficiency wedge (Solow residual) as well as realistic second moments for key aggregate variables, which is in sharp contrast to the model without learning-by-doing.
ISSN:1365-1005
1469-8056
DOI:10.1017/S1365100509080043