Working Paper No. 453
By Haroon Mumtaz and Francesco Zanetti
This paper studies the dynamic response of labour input to neutral technology shocks. It uses a standard real business cycle model enriched with labour market search and matching frictions and investment-specific technological progress that enables a new, agnostic, identification scheme based on sign restrictions on an SVAR. The estimation supports an increase of labour input in response to neutral technology shocks. This finding is robust across different perturbations of the SVAR model. The model is extended to allow for time-varying volatility of shocks and the identification scheme is used to investigate the importance of neutral and investment-specific technology shocks to explain the reduced volatility of US macroeconomic variables over the past two decades. Neutral technology shocks are found to be more important than investment-specific technology shocks.