Technology Shocks and Business Cycles: The Role of Processing Stages and Nominal Rigidities

Louis Phaneuf and Nooman Rebei

Staff Working Papers from Bank of Canada

Abstract: This paper develops and estimates a dynamic general equilibrium model that realistically accounts for an input-output linkage between firms operating at different stages of processing. Firms face technological change which is specific to their processing stage and charge new prices according to stage-specific Calvo-probabilities. Only a fixed fraction of households have an opportunity to adjust nominal wages to new information each period. Intermediate-stage technology shocks account for the bulk of output variability at business cycle frequencies, while final-stage technology shocks do not explain much. Although technology shocks drive the business cycle, the model predicts weakly procyclical real wages, and a near-zero correlation between return to working and hours worked. Furthermore, the model has rich implications for the dynamics of business cycles.

Keywords: Business fluctuations and cycles; Economic models (search for similar items in EconPapers)
JEL-codes: E32 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2007
New Economics Papers: this item is included in nep-dge, nep-mac and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:07-7

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