Staff Working Paper No. 788
By Silvia Miranda-Agrippino, Sinem Hacioglu Hoke and Kristina Bluwstein
We use data on monthly patent applications to construct an external instrument for identification of technology news shocks in an information-rich VAR. Technology diffuses slowly and affects total factor productivity in an S-shaped pattern. Responsible for about a tenth of economic fluctuations at business cycle frequencies, the shock elicits a slow, large and positive response of quantities, and a sluggish contraction of prices followed by an endogenous easing of the monetary stance. The ensuing economic expansion substantially anticipates any material increase in TFP. Technology news shocks are strongly priced into the stock market on impact, but measures of consumer expectations take sensibly longer to adjust, consistent with a New-Keynesian framework with nominal rigidities, and featuring informationally constrained agents.