DP4827 The Effects of Permanent Technology Shocks on Labour Productivity and Hours in the RBC Model

Author(s): Jesper Lindé

Publication Date: January 2005

Keyword(s): permanent technology shocks , hours worked per capita , labour productivity , real business cycle model , vector autoregressions

JEL(s): E24 , E32

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP4827.asp.asp

Recent work on the effects of permanent technology shocks argue that the basic RBC model cannot account for a negative correlation between hours worked and labour productivity. In this Paper, I show that this conjecture is not necessarily correct. In the basic RBC model, I find that hours worked fall and labour productivity rises after a positive permanent technology shock once one allows for the possibility that the process for the permanent technology shock is persistent in growth rates. A more serious limitation of the RBC model is its inability to generate a persistent rise in hours worked after a positive permanent technology shock along with a rise in labour productivity that are in line with what the data suggests.