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PROCYCLICAL SOLOW RESIDUALS WITHOUT TECHNOLOGY SHOCKS

Published online by Cambridge University Press:  01 June 2009

Andrew J. Clarke  and
Alok Johri
Andrew J. Clarke
Affiliation:
University of Melbourne
Alok Johri*
Affiliation:
McMaster University
*
Address correspondence to: Alok Johri, Department of Economics, McMaster University, 1280 Main Street West, Hamilton, Ontario L8S 4M4, Canada; e-mail: johria@mcmaster.ca.
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Abstract

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.

Keywords

Business CyclesLearning-by-DoingProductivity
Type
Articles
Information
Macroeconomic Dynamics , Volume 13 , Issue 3 , June 2009 , pp. 366 - 389
Copyright
Copyright © Cambridge University Press 2009

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